Senate Hearing, 111TH Congress - The Debt Settlement Industry: The Consumer's Experience

S. HRG.
1111017
THE DEBT SETTLEMENT INDUSTRY:

THE CONSUMERS EXPERIENCE
HEARING
BEFORE THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
APRIL 22, 2010
Printed for the use of the Committee on Commerce, Science, and Transportation
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WASHINGTON
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii
KAY BAILEY HUTCHISON, Texas, Ranking
JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine
BYRON L. DORGAN, North Dakota
JOHN ENSIGN, Nevada
BARBARA BOXER, California
JIM DEMINT, South Carolina
JOHN THUNE, South Dakota
BILL NELSON, Florida
ROGER F. WICKER, Mississippi
MARIA CANTWELL, Washington
GEORGE S. LEMIEUX, Florida
FRANK R. LAUTENBERG, New Jersey
JOHNNY ISAKSON, Georgia
MARK PRYOR, Arkansas
DAVID VITTER, Louisiana
CLAIRE MCCASKILL, Missouri
AMY KLOBUCHAR, Minnesota
SAM BROWNBACK, Kansas
TOM UDALL, New Mexico
MIKE JOHANNS, Nebraska
MARK WARNER, Virginia
MARK BEGICH, Alaska
ELLEN L. DONESKI, Staff Director
JAMES REID, Deputy Staff Director
BRUCE H. ANDREWS, General Counsel
ANN BEGEMAN, Republican Staff Director
BRIAN M. HENDRICKS, Republican General Counsel
NICK ROSSI, Republican Chief Counsel
(II)
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CONTENTS
Page
Hearing held on April 22, 2010 ..............................................................................

Statement of Senator Rockefeller ...........................................................................
Statement of Senator McCaskill .............................................................................
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WITNESSES
Gregory D. Kutz, Managing Director, Forensic Audits and Special Investigations, U.S. Government Accountability Office ...................................................
Prepared statement ..........................................................................................
Holly A. Haas, Consumer ........................................................................................
Philip A. Lehman, Assistant Attorney General, North Carolina Department
of Justice ...............................................................................................................
John Ansbach, Legislative Director, United States Organizations of Bankruptcy Alternatives ..............................................................................................
Hon. Julie Brill, Commissioner, Federal Trade Commission ...............................
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APPENDIX
Hon. Kay Bailey Hutchison, U.S. Senator from Texas, prepared statement ......
Hon. Mark Pryor, U.S. Senator from Arkansas, prepared statement .................
John Mark Spaulding, prepared statement ...........................................................
Letter, dated April 20, 2010, to Hon. John D. Rockefeller IV and Hon. Kay
Bailey Hutchison from Jean Noonan, Counsel, American Coalition of Companies Organized to Reduce Debt (ACCORD) ...................................................
Letter, dated October 9, 2009, to the Federal Trade Commission, Office of
the Secretary, from Gail Hillebrand, Financial Services Campaign Manager,
Consumers Union .................................................................................................
Response to written questions submitted by Hon. Mark Pryor to:
Gregory D. Kutz ................................................................................................
William and Holly Haas ...................................................................................
Philip A. Lehman .............................................................................................
John Ansbach ....................................................................................................
Response to written question submitted by Hon. Kay Bailey Hutchison to
John Ansbach .......................................................................................................
Response to written questions submitted by Hon. Mark Pryor to Hon. Julie
Brill .......................................................................................................................
Letter, dated October 16, 2009, to Donald S. Clark, Secretary, Federal Trade
Commission from Susan Grant, Director of Consumer Protection, Consumer
Federation of America on Behalf of Consumer Federation of America, Consumers Union, Consumer Action, the National Consumer Law Center on
behalf of its low-income clients, the Center for Responsible Lending, the
National Association of Consumer Advocates, the National Consumers
League, U.S. PIRG, the Privacy Rights Clearinghouse, the Arizona Consumers Council, the Chicago Consumer Coalition, the Consumer Assistance
Council, the Community Reinvestment Association of North Carolina, the
Consumer Federation of the Southeast, Grass Roots Organizing, Jacksonville Area Legal Aid, Inc., the Maryland Consumer Rights Coalition, MidMinnesota Legal Assistance, and the Virginia Citizens Consumer Council ...
Article, dated August 6, 2009 entitled Economic Factors and the Debt Management Industry submitted by Richard A. Briesch, Ph.D., Associate Professor, Cox School of Business, Southern Methodist University ......................
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(III)
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THE DEBT SETTLEMENT INDUSTRY:

THE CONSUMERS EXPERIENCE
THURSDAY, APRIL 22, 2010
U.S. SENATE,
TRANSPORTATION,
Washington, DC.
The Committee met, pursuant to notice, at 2:37 p.m. in room
SR253, Russell Senate Office Building, Hon. John D. Rockefeller
IV, Chairman of the Committee, presiding.
COMMITTEE
ON
COMMERCE, SCIENCE,
AND
OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV,

U.S. SENATOR FROM WEST VIRGINIA
The CHAIRMAN. We will begin this hearing.

And others are coming. Ive been there, you know. I was late a
lot.
All right. This is important. This is very important. Millions of
American families have suffered serious financial setbacks during
the economic turndown, which promises to go on for a while. Sometimes its because somebody in the family has lost a job. Sometimes
its because a family member has gotten sick and medical bills are
piling up. As we all know, even people who think they have good
health insurance end up owing thousands of dollars out of their
own pockets, and thats another hearing and another subject.
For thousands of Americans and West Virginia families, our economic downturn has meant falling farther and farther behind. It
also means struggling every month to pay bills. And it means
thinking seriously about what happens if they cant make even
their minimum monthly payments to their creditors.
One person who found himself in this situation was Mark
Spaulding, who lives in South Charleston, West Virginia. And between the credit card bills and the hospital bills, he and his wife
owed more than $23,000. That is not unique. He wasnt behind on
these bills, yet he was worried. He had a job, and he believed in
paying what he owed. But, he wasnt sure how he was going to pay
it all off. So, he looked for help. And he found a California company
called U.S. Debt Settlement that looked reputable. Thatsits hard
to see from South Charleston to California, so he was doing this
off the Internet, and had to make that judgment.
He called a toll-free number. He talked to a sales representative
named Holly Slater. She told him that U.S. Debt Settlement could
act as his financial representative and could negotiate with his
creditors to cut his debt by as much as 50 percent.
William and Holly Haas, of Concord, New Hampshire, had a
similar experience with a debt settlement company called Con(1)
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sumer Credit Counseling of America. Notice thesort of the integrity of these names. And Im very pleased that theyre here with
us. And theyre going to have something to say.
What Mr. Spaulding and the Haas family hasand thousands of
other Americans have learned the hard way, is that these debt settlement companies are not what they claim to be. And that is what
we are talking about today. They promise to reduce debts by 40,
50, or even 60 percent, and then collect thousands of dollars in fees
up front. They promise to settle the debts, but collect up front.
When you go into a candy store, you buy a Baby Ruth candy bar,
you get the candy bar, and then you pay the fee. But, its sort of
reversed here.
Today, we will learn that these companies keep the fees, but
dont keep their promises. In reality, signing up to work with these
families and these companies usually makes struggling consumers
financially worse. And thats where that is. They fall farther behind
on their debts, they see their credit scores plunge. And they get
sued by their creditors.
In written testimony, Mr. Spaulding says he followed U.S. Debt
Settlements advice for 14 months and paid them more than $2,400
in feesup front. Today he owes, in fact, 40 percent more than he
did when he began on his debts, and his credit score is ruined. He
has two court judgments against him, and he has been advised he
should think about declaring bankruptcy. This is outrageous. It is
appalling beyond words.
So, these debt settlement companies are kicking people when
they are down. Thats the way I look at it. I come from West Virginia. We see that a lot. And even though they take patriotic
names, like U.S. Debt Settlement or Consumer Credit Counseling
of America, and have all kinds of emblems, which I will show you
in a bit, their actions are, in fact, profoundly un-American. This is
serious, and it is a growing problem, and Im pleased to report that
our States attorneys general and the Federal Trade Commission
are fighting these fraudulent companies.
Were going to hear testimony about these companies from newly
sworn-in FTC Commissioner Julie Brill and from Phil Lehman
Have I got that right?who is Assistant Attorney General from
North Carolina. And we thank you for coming.
Much of this committees work, and my attention as chairman
over this last year, has focused on consumer protection. Its what
everybody else gets angry about, but doesnt do anything about. So,
Ive decided that were going to do something about it in this committee, and we are. And the terrible part is that its not really very
hard to ferret out and that its so rampant. And thats so wrong.
We have the authority to conduct independent investigations in
this committee. And last October, I used this authority to ask the
GAO Special Investigations Office to conduct, in fact, a covert investigation on this problem and the matter of debt settlement as
an industry. I told them I wanted to know what really happens to
a consumer who calls one of these 800-numbers. We will hear the
results of that investigation right here, today. And I think members of the Committee, should they show up, and the American
public will find them pretty disturbing, alarming, and depressing.
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So, I want to thank todays witnesses. I look forward to your testimony as much as I look forward to some of our members showing
up.
And we will start with you, sir.
STATEMENT OF GREGORY D. KUTZ, MANAGING DIRECTOR,
FORENSIC AUDITS AND SPECIAL INVESTIGATIONS,
U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. KUTZ. Mr. Chairman, thank you for the opportunity to discuss the debt settlement industry.
Todays testimony highlights the results of our investigation into
fraudulent and deceptive marketing and business practices.
My testimony has two parts. First, I will discuss the results of
our investigation, and then I will discuss the results of other investigations.
First, as you mentioned, posing as fictitious consumers with significant credit card debt, we contacted 20 debt settlement companies. We attempted to pick companies that, on the surface, ranged
from credible to egregious in their marketing. We did not enter into
any agreements with these companies. The vast majority of companies that weve contacted provided fraudulent, deceptive, and otherwise questionable information to our fictitious consumers.
The monitor shows key themes that we found, including advance
fees, exaggerated claims of success, telling consumers to stop paying their bills, and linking debt settlement to Federal programs.
The basic program setup was for consumers to make a monthly
payment into a bank account. Once that account had accumulated
enough funds, the companies promised to settle debt with creditors
for pennies on the dollar. For 17 companies, advance fees were collected from consumers before any debt was actually settled. Companies told us that their service fees ranged from 10 to 18 percent
of the outstanding debt. These fees were usually taken directly
from the bank account during the first 12 months of what were
typically multiyear programs. In the most egregious cases, 100 percent of the consumers first 3 or 4 monthly payments were used for
fees.
Other fees charged by these companies included monthly maintenance, trust, and bank fees. Exaggerated claims
The CHAIRMAN. If I could interrupt, for a moment.
Mr. KUTZ. Yes, sir.
The CHAIRMAN. I failed to identify you.
Mr. KUTZ. Thats fine.
The CHAIRMAN. No, it isnt.
[Laughter.]
Mr. KUTZ. Im undercover at this hearing, sojust kidding.
[Laughter.]
The CHAIRMAN. I know. I know. But, the folks listening in, et
cetera, or the folks behind you, dont know. And thats my fault,
and I apologize.
You are, in fact, the Managing Director, Forensic Audits and
Special Investigations, U.S. Government Accountability Office,
GAO.
Please proceed.
Mr. KUTZ. Thank you. Now everyone knows who I am.
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The CHAIRMAN. Ive blown your cover, yes.
[Laughter.]
Mr. KUTZ. Youve blown my cover. All right, I cant use that one
again.
Exaggerated claims of success provided our fictitious consumers
with false hope of program completion. Examples included claims
that 85 percent, 93 percent, and even 100 percent of clients successfully completed these programs. The reality, according to Federal and State investigations is a success rate of less than 10 percent.
One industry association represented that their members have a
34 percent success rate. Whether single digits or 34 percent, this
low success rate shows the negative impact of advance fees on financially distressed consumers.
We also found that 17 of these 20 companies advised our fictitious consumers to stop paying their creditors. Although industry
associations say their members dont do this, 9 of the 17 were, in
fact, their members. I have no doubt that for these programs to
work, consumers must stop paying their bills. However, our fictitious consumers were told to stop paying their bills even when they
were current, which would have a significant negative impact on
their credit scores.
Several companies advertised that their debt settlement programs were part of a Federal Government program. My favorite is
the company that advertised that its program was, and I quote, a
national debt-relief stimulus plan, end of quote. These companies
made it appear as if government agencies and stimulus dollars
were linked to their programs. Although I find this to be ridiculous,
and Im sure you do, too, many consumers likely fall prey to these
fraudulent marketing tactics. At the end of my presentation, I will
play excerpts from several of these undercover calls.
Although the vast majority of companies provided fraudulent and
deceptive information, several did provide sound advice. For example, one company told us to take care of our late mortgage payments before worrying about our delinquent credit cards. In another case, our fictitious consumer was told that if we could make
our monthly payments, then perhaps debt settlement was not a
good solution.
Moving on to my second point, the experience of our fake consumers is similar to many real consumers, like the ones sitting to
my left. Cases from 12 Federal and State agencies reveal allegations of fraudulent and deceptive practices involving over 200,000
consumers across the country. This information is taken from Federal and State, open and closed, civil and criminal cases.
In additionand youll hear from FTCthey are taking actions
to enhance consumer protection, including a proposed ban on the
type of advanced fees that I just described.
The Better Business Bureau recently designated debt settlement
as an inherently problematic type of business. Other businesses
with this designation include payday loan centers and wealthbuilding seminars. Im sure you understand, thats not good company.
In conclusion, I cant tell you that all companies in this industry
are bad actors. However, it wasnt very hard for us to find the rot-
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ten apples of this basket. My advice to consumers, Senator, is,
buyer beware.
As I mentioned, Im now going to play for you some of the undercover calls we made to debt settlement companies. You will see the
transcription of the conversations on the monitors as you listen.
[Video presentation.]
TRANSCRIPT
OF
UNDERCOVER GAO CALLS
TO
DEBT SETTLEMENT COMPANIES
Telling consumers to stop paving their creditors. (Industry trade groups say their
members do not do this.):
Clip 1: Call from GAO to A New Beginning Financial (TASC Member)
Debt Settlement Company: You dont actually have to be delinquent to be in our,
into our program, but once you do enter the program you dont make credit, you
dont make your payments to the creditors.
Clip 2: Call from GAO to Freedomdebt.com (USOBA)
Debt Settlement Company: Once you enroll in the program, you will no longer
make any of your credit card payments.
Fictitious Consumer: OK, so . . .
Debt Settlement Company: Thats correct.
Fictitious Consumer: So then, whats, whats gonna happen with my, uh, creditors? I mean . . .
Debt Settlement Company: Theyre, they, theyre, uh, theyre . . . youre not gonna
pay em!
Fictitious Consumer: I shouldnt, I shouldnt pay a few of these cards at all?
Debt Settlement Company: Youre not. . .when you are in our program you will
not pay any of your creditors anymore . . .
Fictitious Consumer: [cross-chatter]
Debt Settlement Company: . . . throughout the whole program.
Clip 3: Call from GAO to Credit Solutions of America
Debt Settlement Company: Im, Im saying I dont, dont tell anybody not to pay
their bills. I say 100 percent of the clients who have been successful have stopped
paying their bills.
Fictitious Consumer: OK. Alright . . . right . . . so now, so . . . so now Im
caught between a rock and a hard place. Do I put money away in my savings account or do I use that money to pay my bills, if Im in your program?
Debt Settlement Company: If youre in our program, umm, put that money into
your savings account.
Fictitious Consumer: OK.
Claims of high success rates: (Federal and state investigators have generally found
single-digit success rates.)
Clip 4: Call from GAO to Web Credit Advisors via Free Debt Settlement Now
(USOBA Member)
Debt Settlement Company: OK, great. So, its important for you to know we have
thousands of clients. Were also an accredited business with the Better Business Bureau with an A rating. Umm, and, uh, we have zero unresolved customer complaints. And thats because we do exactly what we say. And we help 100 percent
of the people who enter this program eliminate their debt, uh, in less than 3 years.
Clip 5: Call from GAO to ProCorp Debt Solutions (TASC Member) via Free Debt
Settlement Now
Debt Settlement Company: Now, our fallout ratio in the program is probably the
lowest in the country. Fallout ratio meaning people that sign up and then dont complete the program.
(cross-chatter)
Fictitious Consumer: Do you know what it is, roughly? Debt Settlement Company:
Yes, its less than 7 percent. Fictitious Consumer: Wow, thats tremendous.
Debt Settlement Company: Its my job to know those numbers. Its my job to know
those numbers.
Fraudulent claims of links to government programs:
Clip 6: Call from GAO to Freedom Fidelity Management (CA) via The Bailout
Group
Fictitious Consumer: With the government the way it is, does this government approved thing, does that have anything to do with the stimulus package?
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Debt Settlement Company: No, no. Its just, its just government approved. They
allow for us to do this.
Fictitious Consumer: OK.
Debt Settlement Company: Um, you know the banks received, you know, bailout
money last yearIm sure you saw it on the news. There has to be some type of
assistance for people on a consumer level also.
Other Fraudulent, Deceptive or Questionable Representations:
Settlement Now
Debt Settlement Company: And there are actually 12,000 companies in the U.S.
that do what we do. Only 200 of them are licensed and regulated. Uh, theyre regulated by TASC, which is The Association of Settlement Companies. . . . They are
the regulating body for this industry.
Fictitious Consumer: So TASC . . .
Debt Settlement Company: Theyre like the SEC for stock traders. TASC.
Fictitious Consumer: So, for you all, that would be kind of like, in your industry,
the Good Housekeeping Seal of Approval?
Debt Settlement Company: Correct. Thats exactly what the story is.
Settlement Now
Debt Settlement Company: The companies that operate like ours are the ones that
are safe, stay around forever. Weve never been inquired on by the Attorney General, ever. You find me a debt settlement company that can say that, and Ill move
over there and work for them. Every debt settlement company that Ive ever come
across has had investigations or inquiries by an attorney, the Attorney General for
their state. The Attorney General doesnt even, doesnt even look our way.
Mr. KUTZ. Mr. Chairman, I applaud your efforts today to protect

consumers from the kinds of fraud and abuse were talking about
here.
That ends my statement, and I look forward to your questions.
[The prepared statement of Mr. Kutz follows:]
PREPARED STATEMENT OF GREGORY D. KUTZ, MANAGING DIRECTOR, FORENSIC
AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Chairman and members of the Committee:
Thank you for the opportunity to discuss our investigation into fraudulent, abusive, and deceptive practices in the debt settlement industry. As historic levels of
consumer debt have dramatically increased the demand for debt relief services, a
growing number of for-profit companies have appeared, offering to settle consumers
credit card and other unsecured debt for a fee as an alternative to bankruptcy.1 The
companies say they will negotiate with creditors to accept a lump sum settlement
less than the amount owedpurported to be as low as pennies on the dollar in
many cases. In addition, these companies often say their programs can result in
lower monthly payments for consumers than what they had been paying their creditors, and that their programs will help consumers get out of debt sooner than going
through bankruptcy or making only minimum payments on their credit cards. They
commonly use radio, television, and Internet advertising to solicit consumers. The
marketing claims appeal to consumers who may be vulnerable, given the stress of
their financial situations.
Some consumers who have hired these companies have complained that they did
not obtain relief from their debts and ended up in worse financial circumstances.
For example, according to a sworn statement given to state attorneys, a 75-yearold New York woman ended up paying more than $5,100 to a company to settle only
$3,900 of debt on one account. The company failed to settle a second one, which she
ultimately paid off for about $1,000 more than what she originally owed. At the time
she signed up for the debt settlement program, she had been a widow for several
years and was working as a pharmacy clerk to help pay her bills and mortgage. She
stated that she often neglected her own needs and accrued more debt trying to help
her adult daughter care for two children and a sick spouse. She also stated that she
was desperate for help and was easily sold on entering a debt settlement program
1 Unsecured debts are those debts for which there is no collateral, such as most consumer
credit card debt.
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through an unsolicited telephone call and an offer to reduce her debts by 24 to 40
percent. Even though the debt settlement company cost her more than she originally owed, it still counted her as a success story.
Federal and state agencies have made allegations that some debt settlement companies engage in fraudulent, abusive, and deceptive practices. You asked us to conduct an investigation of these issues. As a result, we attempted to: (1) determine
through covert testing whether these allegations are accurate; and, if so, (2) determine whether these allegations are widespread, citing specific closed cases. To
achieve these objectives, we conducted covert testing by calling 20 companies while
posing as fictitious consumers with large amounts of debt; made overt, unannounced
site visits to several companies called; conducted interviews with industry stakeholders, such as industry trade associations and the Better Business Bureau (BBB);
and reviewed information on Federal and state legal actions against debt settlement
companies and consumer complaints. We did not actually use the services of any
of the companies we called.
For our first objective, we identified debt settlement companies by searching online using search terms likely to be used by actual consumers, and by observing television, radio, and newspaper advertisements. We selected companies from across
the Nation to call as part of our covert testing by using several criteria, such as:
(1) types of marketing claims or pitches, such as refund offers, service guarantees,
or targeting of specific groups of consumers; (2) presence, if any, of consumer complaints through BBB and other resources; (3) represented size of businesses, to include both small and large companies; (4) availability of consumer-friendly information on companies websites, such as financial education resources, comparisons to
other types of debt relief, or advice on handling credit card debt; (5) membership
in various industry trade organizations, which requires adherence to specified
standards of conduct; and (6) claims of advertising presence on television or radio.
In one case, we identified a company through a spam e-mail message received by
one of our staff members, which provided a link to the companys website.2 The 20
cases that we selected incorporated a range of debt settlement companies, including
some that appeared to make egregious claims and others that appeared more reputable. We found that some of the 20 companies we called are marketing companies
that refer potential clients to othersometimes multipleaffiliated companies. In
most cases, we were unable to determine the exact business relationship between
these entities. For the purposes of this testimony, our 20 cases represent the original company we called, plus any related marketers and any other affiliated companies with which we spoke. In addition, we called some companies more than once,
depending on the circumstances. The findings for these 20 cases cannot be projected
to all debt settlement companies. For our second objective, we identified allegations
against debt settlement companies from review of closed and open civil and criminal
investigations pursued by Federal and state enforcement agencies over the last decade. We did not attempt to verify the facts regarding all of the allegations and complaints we reviewed. We also identified five closed civil and criminal cases where
courts found the debt settlement companies liable for their actions and interviewed
affected consumers.
We briefed Federal Trade Commission (FTC) officials on the results of our investigation. In addition, we referred cases of fraudulent, deceptive, abusive or questionable information provided by the 20 debt settlement companies we called to FTC
as appropriate. We conducted our investigation from November 2009 through April
2010 in accordance with standards prescribed by the Council of the Inspectors General on Integrity and Efficiency.
Background
For-profit debt settlement emerged as a business model as other, decades-old
forms of consumer debt relief came under increased regulation. Traditionally, consumers with large amounts of debt turned to nonprofit credit counseling agencies
(CCA) for debt relief. CCAs work with consumers and creditors to negotiate debt
management plans (DMP), which enable consumers to pay back unsecured debts to
their creditors in full, but under terms that make it easier for them to pay off the
debtssuch as reduced interest rates or elimination of late payment fees. In addition, CCAs often provide consumers with financial education and assist them in developing budgets. In order to qualify for a DMP, consumers must prove they have
sufficient income to pay back the full balances owed to creditors under the terms
of the potential DMP. As part of a DMP, CCAs contact each of a consumers creditors to obtain information about what repayment options the creditors may be willing to offer to the consumer. The CCA then creates the final DMP and a repayment
2 Spam
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is unsolicited junk e-mail that usually includes advertising for some product.
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schedule, with payments typically spread over 3 to 5 years. Throughout the length
of the DMP, the CCA distributes funds to each of a consumers creditors after the
consumer makes each monthly payment to the CCA. Nonprofit CCAs typically receive funding from consumers and from creditors.
Many for-profit CCAs emerged as the level of consumer debt rose over the last
decade, leading to new consumer protection concerns. FTC and state attorneys general took legal action against unscrupulous CCAs that engaged in deceptive, abusive, and unfair practices. For example, some CCAs charged excessive fees, abused
their nonprofit status, misrepresented the benefits and likelihood of success of their
programs, and committed other deceptive and unfair acts. The Internal Revenue
Service (IRS) also undertook a broad examination effort of CCAs for compliance with
the Internal Revenue Code and revoked or terminated the Federal tax-exempt status of some agencies. As Federal and state actions cracked down on these consumer
protection abuses, a growing number of consumers became unable to afford traditional DMPs. As a result, many companies began offering for-profit debt settlement
services for consumers.
Debt settlement companies offer to negotiate with consumers creditors to accept
lump sum settlements for less than the full balance on the consumers accounts. The
process typically requires consumers to make monthly payments to a bank account
from which a debt settlement company will withdraw funds to cover its fees. Some
companies require consumers to set up accounts at specific banks, while others
allow consumers to use their existing bank accounts. These monthly payments must
accumulate until the consumer has saved enough money for the debt settlement
company to attempt to negotiate with the consumers creditors for a reduced balance
settlement.3
Debt settlement companies typically charge a fee for their services and require
payments either at the beginning of the program as an advance fee or after settlement as a contingent fee. Some companies structure the payment of advance fees
so that they collect a large portion of themas high as 40 percentwithin the first
few months regardless of whether any settlements have been obtained or any contact has been made with the consumers creditors. Others collect fees throughout the
first half of the enrollment period in advance of a settlement. Companies that
charge a contingent, or back-end, fee generally base it on a certain percentage of
any settlement they obtain for consumers. They sometimes charge a small, additional fee every month while consumers are attempting to save funds for settlements. In addition, some debt settlement companies handle only one part of the
overall settlement process, such as the front-end marketing or the negotiation with
creditors, while other debt settlement companies conduct every part of the process
themselves.
Currently, there has been only limited Federal action taken against debt settlement companies. Since 2001, FTC has brought at least seven lawsuits against debt
settlement companies for engaging in unfair or deceptive marketing.4 In August
2009, FTC issued a Notice of Proposed Rulemaking to amend the Telemarketing
Sales Rule (TSR) to enhance consumer protections related to the sale of debt relief
services,5 including debt settlement services.6 In its notice, FTC offers multiple criticisms of the debt settlement industry and states that its concerns begin with the
marketing and advertising of the services, but also extend to whether such plans
are fundamentally sound for consumers. The proposed rule would amend the TSR
to do the following, among other things:
prohibit companies from charging fees until they have provided debt relief services to consumers;7
3 Some creditors may sell a consumers debt to a collection agency after the consumer misses
payments for a given period of timetypically 6 to 12 months. The collection agency will then
attempt to collect payments from the consumer. In such cases, debt settlement companies will
generally negotiate with the collection agency seeking the consumers money.
4 FTCs regulatory authority related to false advertising is contained in section 5(a) of the Federal Trade Commission Act (15 U.S.C. 45(a)), which makes unlawful both unfair and deceptive acts or practices that affect interstate commerce.
5 The notice primarily discusses three categories of debt relief servicescredit counseling, debt
settlement, and debt negotiation. While some consider debt negotiation to be another term for
debt settlement, FTC refers to debt negotiation as a separate type of debt relief service. In this
context, debt negotiation companies are those that offer to obtain interest rate reductions and
other concessions from creditors on behalf of consumers, but do not claim to obtain full balance
payment plans or lump sum settlements for less than the full balance. See 74 Fed. Reg. 41988,
41997 (Aug. 19, 2009).
6 74 Fed. Reg. 41988 (Aug. 19, 2009).
7 Under the TSR, advance fees are currently banned for several other industries, including
credit repair services and advance fee loans.
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require companies to disclose certain information about the debt relief services
they offer, including how long it will take for consumers to obtain debt relief
and how much the services will cost; and,
prohibit specific misrepresentations about material aspects of debt relief services, including success rates and whether a debt relief company is a nonprofit.
In its notice, FTC demonstrates that the requesting or receiving payment of advance fees before debts are settled meets its criteria for unfairness, and therefore
designates advance fees for debt settlement services as an abusive practice. FTC
considers advance fees an abusive practice due to the following:
the substantial injury to consumers caused by advance fees, based on the low
likelihood of success for debt settlement programs and the significant burden
on consumers paying advance feesespecially fees charged at the front end of
a debt settlement program, which FTC states ultimately impede the goal of relieving consumers debts;
the injury to consumers caused by advance fees outweighing any countervailing
benefits; and,
the business practices prevalent among debt settlement companies making the
injury to consumers reasonably unavoidable, such as representations in advertisements obscuring the generally low success rates of debt settlement. FTC also
states in its notice that many consumers entering debt settlement programs are
counseled to stop making payments to their creditors in order to facilitate settlements, which has a harmful effect on these consumers credit scores.
Given the absence of specific Federal law, some states have taken the initiative
and enacted their own legislation regulating the debt settlement industry. The regulations vary widely from state to state, however. For example, Virginias detailed
legal framework requires debt settlement companies to apply and pay for an operating license, to enter into written agreements with potential customers that describe all services to be performed and provide the customer a right to cancel at any
time, and to charge only a maximum $75 set-up fee and $60 monthly fee, among
other restrictions.8 Other states, such as Arkansas 9 and Wyoming,10 have chosen
to simply ban most types of for-profit debt settlement companies from operating in
their states at all. Individuals who violate those states bans are guilty of a misdemeanor and could face up to 1 year imprisonment in Arkansas and up to 6
months imprisonment in Wyoming. On the other hand, New York and Oklahoma,
among others, have not yet enacted any laws specifically targeting this industry,
thus leaving the public to rely on generally applicable consumer protection laws.
Covert Testing Shows That Some Debt Settlement Companies Engage in
Fraudulent, Abusive, and Deceptive Practices
Our investigation found that some debt settlement companies engage in fraudulent, deceptive, and abusive practices that pose a risk to consumers already in difficult financial situations. The debt settlement companies and affiliates we called
while posing as fictitious consumers with large amounts of debt generally follow a
business model that calls for advance fees and stopping payments to creditors
practices that have been identified as abusive and harmful. While we determined
that some companies gave consumers sound advice, most of those we contacted provided information that was deceptive, abusive, or, in some cases, fraudulent. Representatives of several companies claimed that their programs had unusually high
success rates, made guarantees about the extent to which they could reduce our
debts, or offered other information that we found to be fraudulent, deceptive, or otherwise questionable. We did not actually use the services of any of the companies
we called. A link to selected audio clips from these calls is available at: http://
www.gao.gov/products/GAO10593T.
Advance Fees
The debt settlement companies we called generally represented that they would
collect fees before settling our debtsa practice FTC has proposed banning due to
the harm caused to consumers. We were able to obtain information about fee structures from 18 of the 20 companies we called while posing as fictitious consumers
8 Va.
Code Ann. 6.1363.2.26.

Code Ann. 563301 to 305.
Stat. Ann. 3314101 to 103.
9 Ark.
10 Wyo.
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with large amounts of debt,11 and found that their fee structures generally recall
the concerns expressed by FTC. Specifically, we found that 17 of the 20 companies
represented that they collected advance fees before debts were settled. Company
representatives told us that the advance fees are calculated based on a percentage
of the consumers debts to be settled, citing figures that ranged from 10 to 18 percent. Moreover, representatives from several companies told us that our monthly
payments would go entirely to fees for up to 4 months before any money would be
reserved for settlements with our creditors. Only 1 of the 20 companies we called
represented that it followed a contingent fee model based on a percentage of the reduction of debt it says it obtains for consumers. Representatives from this company
said a fee equal to 35 percent of each clients reduced debt was charged. Some companies also represented that they assessed monthly maintenance and other additional fees. One of the 17 advance-fee companies also revealed that it charged a contingent fee after each debt is settled based on a percentage of the debt reduction.
FTC has banned advance fees in several industries, such as credit repair, based
on analyses that determined these practices to be unfair because sellers often do not
provide the services for which they charge. The agency has proposed a similar ban
for debt settlement, stating that the advance fees cause substantial injury to consumers. FTC justified this stance toward debt settlement, in part, based on the following findings: advance fees induce financially strapped consumers to stop making
payments to their creditors; and consumers are unlikely to succeed in debt settlement programs, given evidence from Federal and state agencies that generally
shows single-digit success rates.12 Moreover, FTC stated concerns in its notice that
advance fees for debt settlement may actually impede the process of saving money
to settle debts, especially substantial fees collected at the beginning of a program.
This business model may be especially risky for consumers who are already in financially stressed conditions, given that interest, late fees, and penalties often continue to accrue on the consumers accounts as they work to save money toward settlements. In addition, consumers with already limited financial resources may be
unable to direct adequate funds toward saving for settlements if their resources are
being devoted to paying fees.
We asked representatives of some companies what services we would receive as
we paid advance fees while saving money for settlements. These representatives
generally stated that our advance fees would pay for financial education, updates
from attorneys, and communications with our creditorssuch as cease and desist
letters, to attempt to prevent harassing telephone calls. One representative, however, was unable to provide an explanation of what services we would receive for
our advance fees beyond the fact that her companys attorneys would look at our
accounts every month. Several companies we called had basic financial education resources on their websites or provided links to such resources by e-mail. Industry
representatives have stated that advance fees are needed to cover essential operating costs, such as overhead and providing the types of services mentioned above
for their existing clients. However, FTC found that marketing and acquiring new
customers make up a large portion of the operating costs for debt settlement companies. We were unable to verify whether any companies we called provide ongoing
services for clients they enroll in their programs, given that we did not enter into
business relationships with them.
Directing Consumers to Stop Paying Creditors
We also found that the companies we called generally follow a business model
that poses a risk to consumers by encouraging them to stop making payments to
their creditors, a practice that harms consumers because of the damage it typically
causes to their credit scores. Representatives of nearly all the companies we called
17 out of 20advised us to stop paying our creditors, by either telling us that we
would have to stop making payments upon entering their programs or by informing
us that stopping payments was necessary for their programs to work, even for accounts on which we said we were still current. The following quotes demonstrate
some of the statements made by representatives of the companies we called regarding our payments to creditors:
You stop paying, uh, those payments out to those creditors. The only thing
youre going to have to worry about is this payment here [to company].
11 Of the two companies for which we were unable to obtain fee information, one company presented an audio recording of general information about its program, and one companys representative told us we did not have enough debt to qualify for its program.
12 Federal and state agencies have defined success as consumers being able to obtain the results that the debt settlement companies promised them.
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One-hundred percent of our clients stop making their monthly payments as
soon as they enroll into the program.
I wont tell anybody not to pay their bills; I said one-hundred percent of the
clients who have been successful have stopped paying their bills.
Say you enrolled in the program. At that point you would no longer make any
of your credit card payments. All of them would go late.
Among the 17 companies encouraging us to stop paying our creditors or representing that stopping payments is a condition of their program,13 5 were members
of an industry trade group called The Association of Settlement Companies (TASC)
at the time we made our calls. TASCs written standards, adherence to which is required of all member companies, explicitly state No Member shall direct a potential
or current client to stop making monthly payments to their creditors. A representative of 1 of these 5 TASC member companies told us that she could not direct us
to stop paying our creditors, but later stated that if we could afford to make our
payments then her program was not the best solution for us. In addition, a representative of 1 of these 5 TASC member companies appropriately screened us out
by telling us that we had too low of income to afford that companys program under
the scenario we presented; he later described his companys program as requiring
clients to stop making their payments. In addition to these 5 TASC member companies, we spoke to a representative from another TASC member company who told
us that we did not have enough debt to qualify for that companys program. In addition, 4 of the companies that told us to stop paying our creditors or represented that
stopping payments was a condition of their program were members of a different
industry trade group called the United States Organizations for Bankruptcy Alternatives (USOBA) at the time of our calls. According to USOBA representatives
whom we interviewed, its member companies do not tell potential clients to stop
paying their creditors. We received particularly good advice from a representative
of 1 additional USOBA member companynot among the 4 listed abovewhose
representative told us that we should worry about taking care of our late mortgage
payments before we worried about settling our credit card debts.
Stopping payments to creditors results in damage to consumers credit scores. According to FICO (formerly the Fair Isaac Corporation), the developer of the statistically based scoring system used to generate most consumer credit scores, payment
history makes up about 35 percent of a consumers credit score. Moreover, the damage to credit scores resulting from stopping payments is generally worse for consumers who have better credit historiessuch as consumers who maintained good
payment histories prior to entering a debt settlement program that required them
to stop making payments. In its notice, FTC also discussed the harmful effect that
stopping payments has on consumers credit scores.
Success Rates
In several cases, representatives of companies we called claimed success rates for
their programs that we found to be suspiciously high85 percent, 93 percent, even
100 percent. In its notice, FTC cites claims of high likelihood of success as a frequent representation in the debt settlement industry. The success rates we heard
are significantly higher than is suggested by evidence obtained by Federal and state
agencies. When these agencies have obtained documentation on debt settlement success rates, the figures have often been in the single digits. For example, as part of
an annual registration process in Colorado, the states Attorney General compiled
data on success rates for all debt settlement companies statewide. The data show
that, from 2006 to 2008, less than 10 percent of Colorado consumers successfully
completed their debt settlement programs. Our case studies discussed below provide
additional evidence of similarly low success rates.
Industry-reported data have claimed a higher success rate for debt settlement programs. According to TASC, data gathered from a survey of some of its largest member companies in 2009 shows that 34.4 percent of consumers participating in a debt
settlement program offered by a TASC member company completed their debt settlement programs by settling at least 75 percent of their enrolled debts.14 A previous study released by TASC in 2008 claimed overall completion rates between 35
and 60 percent. However, Federal and state agencies have raised concerns with the
13 As stated above, some companies we called referred us to one or more affiliates. We were
unable to determine the relationship between these companies and their affiliates.
14 While TASC requires its member companies to make a series of disclosures in its discussions with potential clients, the individual completion rate for each companys program or the
34.4 percent overall completion rate mentioned in TASCs study are not among the required disclosures.
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methodology behind TASCs data. For example, these agencies have argued that: (1)
TASCs data were self-reported by its member companies, and may not reflect all
member companies; (2) not every TASC member company that submitted data defined completion in the same way; and (3) the fact that consumers complete a debt
settlement program does not necessarily imply that these consumers successfully obtained the debt relief services for which they paid. We did not attempt to validate
success or completion data from TASC or Federal or state agencies.
TASC and USOBA have cited several factors that might contribute to consumers
success rates in debt settlement programs, such as that most consumers entering
debt settlement programs are in extreme financial hardship and may choose to quit
their program after settling some debts and improving their financial situations.
However, FTC stated in its notice that the prevalent fee structure in the debt settlement industrysubstantial up-front feesmay be a major factor in the generally
low consumer success rates as well. TASC and USOBA have both offered suggestions for ways to boost consumer success rates, such as improved processes for determining consumers suitability for debt settlement programs.
Debt settlement success rates also play a key role in the BBB rating system for
companies in the industry. Due to the volume and nature of consumer complaints,15
among other factors, BBB recently designated debt settlement as an inherently
problematic type of business and, in September 2009, implemented new rating criteria for debt settlement companies to reflect this designation. Under this designation, no debt settlement company may earn a BBB rating higher than a C.16
While BBB has designated other types of businesses as inherently problematic
such as pay-day loan centers, businesses that charge fees for publicly available information on government jobs, scientifically unproven medical devices and products,
advance fee modeling agencies, and wealth-building or real estate seminarsdebt
settlement companies are the only type of business currently allowed by BBB to escape the inherently problematic designation if they provide evidence to BBB that
they meet a series of criteria. These criteria require a debt settlement company to
prove, among other things, that:
It has substantiated all advertising claims, including claims relating to the benefits or efficacy of debt settlement;
It makes certain disclosures to consumers, including clear and conspicuous disclosure of program fees and the risks of debt settlement;
It has adequate procedures for screening out consumers who are not appropriate candidates for debt settlement; and
A majority (at least 50 percent) of its clients successfully complete its program
and obtain a reduction in debt that is significant and exceeds the fees charged
by the company.
According to a BBB official, he was unaware of any debt settlement company that
had yet successfully demonstrated that it met these criteria, as of March 2010. Officials from TASC and USOBA told us they strongly disagree with BBBs new rating
system for debt settlement companies. According to these officials, the new rating
system minimizes the importance of resolved consumer complaints, requires an unrealistic measure of programs success rate50 percentand inhibits consumers
ability to differentiate between reputable and disreputable debt settlement companies.
15 According to data it provided to us, BBB has received thousands of complaints about debt
settlement companies in recent years, with the number of complaints rising from 8 in 2004 to
nearly 1,800 in 2009. This figure may underestimate the total number of complaints related to
debt settlement, as not all companies providing debt settlement services are classified as debt
settlement companies by BBB. According to BBB, these complaints are related primarily to debt
settlement companies: (1) charging advance fees without providing services as promised to consumers and sometimes without providing any services at all; (2) failing to disclose important
information to consumers, such as unannounced fees; and (3) failing or refusing to provide refunds to consumers.
16 According to BBB, its rating system uses grades based on a proprietary formula that incorporates information known to BBB and its experience with the business under assessment. The
ratings are intended to represent BBBs degree of confidence the business is operating in a
trustworthy manner and will make a good faith effort to resolve any customer concerns. The
rating system uses grades from A to F, with plusses and minuses, so that A+ is the highest
grade and F is the lowest. Some debt settlement companies may currently have a BBB rating
higher than a C because they were misclassified (e.g., characterized by BBB as something
other than a debt settlement company) or because debt settlement does not represent a substantial portion of its services.
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Guaranteed Reductions in Debt
Representatives from some companies also guaranteed or promised that they
could obtain minimum reductions in our debts if we signed up for their services. For
example, some representatives stated that they would save us 40 to 50 cents on the
dollar once they negotiated settlements with our creditors. In its notice, FTC cites
claims of specific reductions in debt as an example of a consumer protection abuse
in the debt settlement industry.
Fraudulent or Other Deceptive Representations
We found examples of companies offering fraudulent or other deceptive information, such as using names and imagery for their services that indicates that their
program is linked to the government. Table 1 below shows examples of fraudulent
or deceptive information from companies we called.
Table 1: Examples of Fraudulent or Deceptive Information Provided by Debt Settlement Companies We Called
No.
Representation
Comments
Debt settlement companies are licensed and regulated by TASC, which is like the SEC [United
States Securities and Exchange Commission] for
stock traders.
TASC is a nonprofit trade association that lobbies

lawmakers on behalf of the debt settlement industry. It is not a licensing or regulatory authority.
Stopping payments will knock [credit score] down

a couple of points . . . However, unlike bankruptcy
or any other credit counseling program, this only
affects your credit while youre in the program.
According to FICO, stopping payments to creditors

as part of a debt settlement can drop credit scores
anywhere between 65 to 125 points. In addition,
missed payments leading up to a debt settlement
can remain on a consumers credit report for 7
years even after a debt is settled.
Debt settlements will be noted on consumers credit reports as paid in full or paid as agreed.
According to FICO, settlements are typically listed

on consumers credit reports as settlement accepted on the account or settled for less than full balance.
Company advertises a National Debt Relief Stimulus Plan.
The companys services are not affiliated with a

government program or part of the American Recovery and Reinvestment Act of 2009 (the stimulus).
Company promised that calls from creditors seeking money will slow down and eventually stop if
we just told our creditors we had hired the company.
Debt settlement companies cannot prevent creditors from contacting consumers. Companies often
advise consumers to terminate all communication
with their creditors, ask consumers to assign power
of attorney to them, and send cease and desist letters to creditors in an attempt to cutoff further
communications.
Source: GAO.
Five of our cases are highlighted below. The companies in these cases made multiple fraudulent or deceptive representations either to our fictitious consumers by
telephone, on their websites and through company documents or to our staff during
unannounced, overt site visits. Table 2 below shows basic information represented
by these companies, including the location, fees, and industry trade association
membership of each of these companies and their affiliates, if any. (Table 4 in appendix I provides summary information on all 20 companies we called.)
Table 2: Representations Made by Select Debt Settlement Companies We Called
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No.
Location of company and affiliates
Fees a
Association
membership b
Florida; affiliates in Florida,

Massachusetts, California,
and New Jersey b
Advance fees based on 15 percent of enrolled debt,

with monthly payments required throughout program.
TASC; c affiliates
in TASC and
USOBA
Unknown; affiliates in
Arizona, Texas, and
California b
Affiliate in
USOBA
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Advance fees based on 12 percent of enrolled debt

First 3 monthly payments go to fees.
$25 monthly maintenance fee.
Additional contingent fee based on 4 percent of reduction in debt company obtains for clients.
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Table 2: Representations Made by Select Debt Settlement Companies We CalledContinued
No.
Location of company and affiliates
Fees a
Association
membership b
California

$100 fee for out-of-state clients.
TASC (at the time

of our call)
California

$840 maintenance fee (total throughout program)
$623.50 trust account fee (total throughout program).
TASC
California
Advance fees based on 15 percent of enrolled debt
TASC (at the time

of our call)
Source: GAO analysis of information obtained from debt settlement companies.

a Fee information reflects fees disclosed to us; some companies may charge additional fees that were not disclosed. Debt settlement
companies typically charge fees requiring payments either at the beginning of the program as an advance fee or after each settlement as a contingent fee. Some companies structure the payment of advance fees so that they collect a large portion of themas
high as 40 percentwithin the first few months regardless of whether any settlements have been obtained or any contact has been
made with the consumers creditors. Others collect fees throughout the first half of the enrollment period in advance of a settlement.
Companies that charge a contingent fee generally base it on a certain percentage of any settlement they actually obtain for consumers. They sometimes charge a small, additional fee every month while consumers are attempting to save funds for settlements.
b Some companies we called referred us to one or more affiliates. It was not always clear to us exactly with which company or affiliate we were speaking, where the companies or affiliates were located, or what the relationships were between the companies and
affiliates. In some cases, separate affiliates of the same company claimed to be members of different industry trade associations.
c While Company 1 claimed to be a member of TASC, it appears this was a false representation.
Company 1
Company 1 made several fraudulent and deceptive representations. We identified
Company 1 when one of our investigators received an unsolicited spam message
through his private e-mail account advertising debt settlement services, with a mailing address in the country of Lebanon listed at the bottom. A link in the message
brought us to a website advertising New Government Programs! New free and easy
programs are available for those who are in debt right now! Take advantage while
theyre still available
[sic]. (See figure 1 below.) The website also featured logos for TASC and BBB,
along with other insignias declaring Satisfaction Guaranteed and Privacy 100
percent Guaranteed. When we called the number listed on the website, a representative answered using the name of an affiliate different than the company name listed on the website. He explained that the website was a generic advertisement to
spread information about his company. Throughout our conversation, he made multiple statements that we found to be deceptive or questionable. According to the representative, the worst case scenario for settlement of our debts would be 40 cents
on the dollar. He stated that his company has helped 100 percent of its clients get
out of debt in 3 years or less, and that every single creditor settles. Theres not
one creditor we havent been able to reach a settlement with. When asked about
the government programs advertised on the website, he replied What were offering
is not part of any government program whatsoever. . . . Its just that the government is allowing this to take place at this time. . . . The government is putting
pressure on banks to allow things like this so that, you know, there are no more
bankruptcies or things along those lines. Even though the website displayed a
TASC logo, we were unable to find either Company 1 or this affiliate on TASCs
member directory. The Executive Director of TASC confirmed to us later that neither Company 1as it listed itself on its websitenor this affiliate is a member of
the organization. The affiliates website displays a logo for USOBA, and we confirmed its membership with that organization.
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Shortly after we called Company 1 the first time, we noticed that the website contained some changeswhen we attempted to leave the website on later visits, a popup message appeared declaring If we cant get you out of debt in 24 hours well
pay you $100! (See figure 1 above.) We called Company 1 again and a representative said that he was with Company 1. He later stated that he was actually with
an affiliate of Company 1a different affiliate than the first representative with
whom we spoke. He described the website for Company 1 as a landing page used
to attract business to his company. This second representative also offered deceptive
or questionable information, such as a 93 percent success rate for his program.
When asked about the government programs advertised on Company 1s website, he
replied that the government program was related to creditors ability to obtain tax
credits from the IRS for the debts they sell to collection agencies. Regarding the
offer to get consumers out of debt within 24 hours, he said that this was for clients
who have the financial resources to make a large lump sum payment at the very
beginning of the program. However, he added that ninety-nine point 9 percent of
the people that come to us do not have the ability to do that. When we asked about
the risk of being sued by our creditors, he told us that a judgment is nothing more
than a fancy I.O.U. We were able to find this second affiliate on TASCs member
directory, and the Executive Director of TASC later confirmed that this affiliate is
a member of TASC.17
We made a site visit to Company 1 in Florida. The owner of Company 1 admitted
that the company does not really exist and is really just a marketing website, and
told us he actually owns a different company that offers both debt settlement and
mortgage modification services. He claimed that he did not know that Company 1s
website contained information about an alleged government program, and logos for
TASC and BBB. However, he acknowledged that neither Company 1 nor his real
company is a member of TASC despite the logo featured on the website.18 When
asked about the offer to get consumers out of debt within 24 hours, he replied that
this was a typo and that the offer should say 24 months rather than 24 hours.19
Our investigators observed employees at the location listed for Company 1 representing on the telephone that they were employees of the second affiliate mentioned above. Moreover, when the owner of Company 1 gave our investigators a copy
of the script his employees use when speaking with potential clients, the text of the
script implied that they were representatives of the second affiliate. We were unable
to determine the actual relationship, if any, between Company 1, its affiliates, or
the other company the owner claimed he runs.
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17 We also identified an additional website at a different address that was nearly identical to
the one that referred us to the two representatives discussed above, with the same phone number and logos for TASC and BBB, but listing what appeared to be a different company name
entirely.
18 TASCs executive director confirmed that Company 1 is not a member.
19 Prior to our site visit, we found a testimonial from an alleged client on Company 1s website
claiming that Company 1 helped her to cut her monthly bills in half in 24 hours.
16
Company 2
Company 2s online and radio advertisements feature multiple fraudulent or deceptive claims. The companys website advertises that its services will Reduce balances to 40 percent60 percent, Eliminate excessive Credit Card Debt interest
immediately, and End late payment fees [sic]. When we called Company 2, it referred us to at least 3 different affiliates. It was not always clear exactly with which
companys representatives we were speaking.20 Representatives from these affiliates
described Company 2 as a marketing group that referred potential clients to them.
We also identified radio advertisements placed in several major cities purporting to
be from Company 2, in which it claimed to offer a government authorized and
government approved debt settlement program. When we called the telephone
number listed in one of the radio advertisements, a representative answered from
one of the affiliates of Company 2 that we had spoken to earlier. When asked about
the government-approved debt settlement program, the representative acknowledged the radio advertisement and replied it is government approved. . . . They
allow for us to do this. You know, the banks received, you know, bailout money last
year. Im sure you saw it on the news. There has to be some type of assistance for
people on a consumer level also. According to this representative, Company 2 runs
similar advertisements on television and radio stations nationwide.
We were unable to visit Company 2 because we could not determine its physical
location. However, we visited the affiliate whose representative discussed the radio
advertisement with us, which is located in California. Officials from this affiliate
told us that their company is the most legitimate debt settlement company, and
that their employees receive commission based on the number of clients they enroll
in the companys program. They also claimed that their company was not associated
with Company 2, and refused to disclose to us the number of clients in their program or the total amount of consumer debt their company is currently handling. On
two separate covert telephone calls we made to Company 2, representatives of this
affiliate stated they were with Company 2 at the beginning of each call but later
informed us that they actually were with the affiliate and that Company 2 handled
their marketing. When asked during our site visit if we could see their call center,
officials refused.
Company 3
Company 3 targets Christians for its debt settlement services by employing a Biblical marketing theme, both on its website and over the phone. Representatives of
Company 3 told our fictitious consumers that they run a nonprofit ministry affiliated with their for-profit debt settlement company, with funds from debt settlement
feeding into the ministry and missionary trips overseas. In addition, representatives
told us that their program has an 85 percent success rate and that they would negotiate our debt down to 40 or 60 percent of what we currently owed. About the risk
of being sued by our creditors, a representative remarked to us that Its just a computer thing. I mean, sometimes theres a handful of them that theyll have reserved
to go after and its just random. But even if they were to do that in your case, its
just a small percentage; wed be able to advise you at that time, too. You dont need
an attorney in the matter or anything like that. Its just a civil thing.
We visited Company 3 in California, where we found it located in a strip mall
near a grocery store. The owner of Company 3 told us that he owned a mortgage
company and sold cars prior to entering the debt settlement industry. Company 3
handles the front end of the debt settlement process by signing up clients, and uses
a third-party company and law firm for the rest of the process. Most of the employees of Company 3 are contractors who earn $200 commission for each client enrolled, with bonuses for employees who enroll a high number of clients. According
to Company 3 officials, they enrolled approximately 1,200 to 1,300 new clients in
the first 212 months of 2010. When asked if we could see a copy of their IRS Form
990 for the nonprofit side of their operation, the owner replied, The Bible says you
should never let the left hand know what the right hand is doing. 21 Company officials provided us with a sample of its contract, which states that In the event Client comes into a lump sum of money and wishes to settle an account before original
20 A recent report by the Maryland Consumer Rights Coalition stated that debt settlement
companies often seem a many-headed Hydra with parent companies split from other divisions
that handle the marketing and solicitation. The report further states that this division of services causes confusion for consumers trying to track the progress of their debt settlement, and
for agencies attempting to enforce compliance.
21 IRS Form 990 is a Federal information return filed annually by tax-exempt public charities.
Information reported on this return includes assets held, contributions received, and grants
paid.
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designated completion date, Client must first pay [Company 3] Fee. The remainder
of the lump sum will be utilized in settling Clients unresolved program debt. The
contract also states that Company 3 does not provide legal representation or any
legal advice to its clients.
Company 4
We became interested in calling Company 4 when we noticed on its website that
it advertised a U.S. National Debt Relief Plan, with a logo depicting a shield filled
with a U.S. flag. When asked about this plan, a representative stated that it was
a consumer advocacy program entitled [sic] to help consumers get out of debt but
that its not a government agency. We just take advantage of the fact that the government are [sic] giving money to the banks to get out of debt and we just show
you and go through the route of settling out your accounts. The representative also
told us that our first 3 monthly payments would go entirely to paying fees with no
money set aside for savings. He said that Company 4 uses this advance fee structure because, during the first few months of the program, the company would be
setting up our account and mailing cease and desist letters to our creditors, and to
show that you have the commitment to be in the program.
When we visited Company 4 in California, officials told us that the company only
handles the front-end marketing of the debt settlement process, and that it had enrolled approximately 1,000 clients in the first 212 months of 2010. In early March
2010, TASC issued a statement on its website noting a recent increase in companies
practicing deceptive marketing, including companies sending letters to potential clients resembling government documents and using terms like U.S. National Debt
Relief Plan. Company 4 marketed the U.S. National Debt Relief Plan, and is a
member of TASC.
Company 5
A representative of Company 5 advised us that we could not afford its debt settlement program because our fictitious consumers income was too low and his expenses were too high. He suggested that we consider credit counseling or bankruptcy as options if we were unable to make substantial improvements in our budget. However, when we indicated that we may obtain a new job soon that would boost
our income, he provided details on how Company 5s debt settlement program
works. He told us that it generally takes about 7 to 8 months to save up enough
money to begin negotiating settlements. When we asked what services we would be
paying for during those first 7 to 8 months, he replied that our fees would pay for
the ability to get out of debt within 36 months, and monthly education and updates
from the companys attorneys. Company 5s website advertised that it can help consumers who are experiencing stress, anxiety, and depression associated with being
in debt. When we asked about these services, the representative laughed and said
these services are arranged through debt negotiators who will hold monthly strategy
calls with us.
We attempted to visit Company 5 in California, but found that it was no longer
at the location listed on its website. Employees of several other companies in neighboring office suites told us that Company 5 had moved to another office down the
hall, which was listed under a different company name. An official from this company denied knowing anything about Company 5, and claimed that his company did
not provide debt settlement services. However, records we obtained indicate that the
name of Company 5s owner is the same as the name on this officials drivers license. In addition, the website for this other company indicates that it does, in fact,
provide debt settlement services. After we returned from our site visit, the website
for Company 5 was down for maintenance.
Allegations of Fraud, Abuse, and Deception in the Debt Settlement Industry
Are Widespread
We found the experience of our fictitious consumers to be consistent with the
widespread complaints and charges made by Federal and state investigators on behalf of real consumers against debt settlement companies. We identified allegations
of fraud, deception and other questionable activities that involve hundreds of thousands of consumers.22 We drew this figure from closed and open civil and criminal
cases governments have pursued against these companies over the last decade. Our
calculation likely underestimates the total number of consumers affected, since we
obtained information from only 12 Federal and state agencies about the clients with22 We did not attempt to verify the facts regarding all of the allegations pursued by Federal
and state agencies that we identified.
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in their jurisdiction that they identified in some of the cases they pursued.23 Federal
and state agencies have reported taking a growing number of legal actions against
companies that offer these services in recent years. As mentioned above, since 2001,
FTC has brought at least seven lawsuits against debt settlement companies for engaging in unfair or deceptive marketing. The National Association of Attorneys General (NAAG) said in an October 2009 letter to FTC that 21 states brought at least
128 enforcement actions against 84 debt relief companies, including debt settlement
companies, over the previous 5 years.24 The group stated that the number of complaints received by the states about debt relief companiesespecially debt settlement companieshad more than doubled since 2007. Last, the group noted that any
business model requiring cash-strapped consumers to pay substantial up-front fees
raised significant consumer protection concerns and agreed with a consumer group
that called it inherently harmful.
Attorneys general from 40 states and 1 territory submitted the letter, saying they
supported FTCs proposed rule changes to combat unfair and deceptive practices in
the industry. They cited similar debt settlement activities that prompted their own
enforcement actions, including the following:
collecting advance fees in many instances without providing services;
misleading consumers about the likelihood of a settlement;
misleading consumers about the settlement process and its adverse effect on
their credit ratings;
making unsubstantiated claims of consumer savings;
deceptively representing the length of time necessary to complete the program;
misleading or failing to adequately inform consumers that they will be subject
to continued collection efforts, including lawsuits;
misleading or failing to adequately inform consumers that their account balances will increase due to extended nonpayment under the program; and
deceptive disparagement of bankruptcy as an alternative for debtors.
The state attorneys general expressed concern the industry would grow exponentially given the current economic climate and a regulatory environment that allows
substantial advance fees to be collected. They criticized the advance fees as providing minimal incentive for companies to perform services because they get paid
whether or not they take any action on behalf of the consumer. They also noted that
low set-up costs help in the promotion of debt settlement as a cheap business opportunity. They stated that they would continue to take enforcement actions against
unscrupulous operators in the industry, but that they also believed the proposed
FTC rule changes would substantially aid law enforcement agencies in addressing
harms caused to consumers.
We developed case studies from five closed civil or criminal actions in which state
or Federal courts found debt settlement companies liable for fraudulent, unfair or
deceptive actions that left clients in worse financial conditionbankrupt, owing
more debt, and with lower credit scores and more judgments against them. We also
examined the experiences of a consumer from each of these cases. Table 3 below
shows key information from each of these five cases. Further details are discussed
below.
23 We obtained information from the following agencies: Federal Trade Commission, U.S. Department of Justice, and state law enforcement agencies in Alabama, Colorado, Delaware, Florida, Illinois, North Carolina, New York, Texas, Vermont, and West Virginia. They identified clients through company records, individual complaints, and restitution paid. We focused on select
states with enforcement actions listed in a National Association of Attorneys General letter. We
did not attempt to query all 50 states.
24 According to the letter, the 128 enforcement actions listed in its attachment do not represent a comprehensive list of all cases filed or regulatory actions taken against debt relief companies. We did not attempt to verify the facts regarding all of the actions listed in the letter.
Details regarding 3 of these enforcement actions are provided below, as case studies 1, 3, and
4.
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Table 3: Select Cases of Debt Settlement Companies Engaged in Fraudulent, Abusive, or Deceptive Practices
VerDate Nov 24 2008
No.
Company
location
Federal/state
agency
Case details
Arizona; affiliates in Arizona

and Florida
New York Attorney

General
More than 500 New Yorkers withdrew from the debt settlement program after paying over $1 million in fees only to receive more debt, tarnished credit ratings, and increased collection calls and creditor lawsuits.
Nearly half of the New York clients that completed the program during the Attorney Generals investigation, or 27 out
of 64, ultimately paid more than they originally owed.
Only 0.3 percent of the New York clients realized the promised savings.
A New York court found the company and its affiliates liable
for statutory fraud and ordered restitution for clients who
paid more than they owed.
New York and

Vermont
U.S. Attorney
General
An attorney and his law firm associates misappropriated and

embezzled millions of dollars from 15,000 clients seeking
debt reduction help over a 6-year period, forcing some customers into bankruptcy.
The group lured consumers through television and radio advertisements by falsely claiming a 50 to 70 percent savings
off unsecured debt, an improvement in credit scores and
bankruptcy avoidance.
Only 8 percent of the groups clients completed the program.
Clients paid advance fees for these services and funded escrow accounts from which their creditors were supposed to
be paid. The fees were not considered earned until consumer debts were settled.
The fees collected were used in part to fund huge payments
to the attorney and two of his associates before they provided any services to clients.
The client escrow accounts were drawn upon, in part, to
cover overdrafts from the law firms operating account and to
make payments to the attorneys wife, among other things.
The law firm filed for bankruptcy in 2003.
A Federal jury found the attorney guilty in 2005 on multiple
felony counts, including fraud. His six associates pled guilty
to Federal charges.
Florida
North Carolina
Attorney General
Two companies and their owners ran an illegal debt settlement business using unfair and deceptive practices, collecting over $500,000 from about 220 North Carolinians who
rarely obtained the services they purchased.
North Carolina law prohibits anyone from acting as a forprofit intermediary between residents and their creditors for
the purpose of reducing, settling, or altering debt payments,
except in limited circumstances. It specifically bans advance
fees for these services.
The companies and their owners, one of whom was an attorney, marketed their services in part using third-party referral agents who received compensation for directing consumers to the group.
Many clients dropped out of the program dissatisfied. Few
received refunds or obtained settlements with their creditors.
Many filed for bankruptcy.
A North Carolina court found that the groups actions violated state law and banned the parties from doing any debtrelated business with state residents. In a separate action in
January 2009, the attorney was disbarred for a period of 5
years.
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Table 3: Select Cases of Debt Settlement Companies Engaged in Fraudulent, Abusive, or Deceptive
PracticesContinued
No.
Company
location
Federal/state
agency
Case details
Maryland
Maryland Attorney
General
A Maryland attorney, his law firm and their marketers used

unfair and deceptive trade practices to collect $3.4 million
from about 6,200 clients over a 2 year period to settle debt
but provided little or no services in return, causing harm to
consumer credit histories and credit scores.
The group told clients that its employees were qualified credit counselors capable of recommending the most appropriate
action, but instead it provided virtually the same advice to
everyoneenter debt settlement plans profitable for the
group.
The group reached an agreement in 2007 with the Attorney
General, agreeing to immediately cease and desist selling
unlicensed debt settlement services, pay restitution to customers, and pay investigatory costs and a fine to the state
consumer protection office.
The Attorney General filed a lawsuit in 2008 against the
group for violating the terms of their agreement and the
states consumer protection act. The court ordered the group
to fulfill the terms of its previous agreement, pay a fine and
costs of $180,000, and pay restitution of almost $2.6 million.
California
Federal Trade
Commission
Four related California companies lured more than 1,000

consumers into a debt settlement program through false
promises of reducing debt, halting collection calls, removing
negative credit report information, and holding payments in
trust to settle accountsfrom which, the FTC alleged, more
than $2 million later went missing.
FTC filed a complaint against the companies in August
2002, alleging that numerous consumers who enrolled in the
program saw their indebtedness increase after incurring late
fees, finance charges, and overdraft charges. Many ultimately filed for bankruptcy.
The Federal court entered default judgments against all four
companies, banning them from engaging in any debt settlement services and ordering them to collectively pay $1.7 million in restitution to consumers, among other actions.
Source: GAO analysis of case studies discussed below.
Case Study 1
An Arizona company and its affiliates used false advertising and deceptive marketing to fraudulently induce more than 500 New Yorkers into paying over $1 million in fees for a debt settlement program that left them with more debt, tarnished
credit ratings, and increased collection calls and creditor lawsuits. The group told
clients that consumers typically saved between 25 percent and 40 percent, including
all fees and charges. It also promised to substantially reduce credit card debt in as
little as 24 months. However, according to the New York Attorney General, only 0.3
percent of the companys clients realized these savings and few ever completed the
program. Only 64 of the groups New York clients finished the program during the
time period of the Attorney Generals investigation (between January 2005 and September 2008); another 537 withdrew from the program after paying fees. Those who
finished the program complained of being deceived and harmed by the group. Nearly
half of them actually paid more than they owed. For example, one said, I actually
paid 87 percent more than what was originally due. Another said that the company
did not settle any of my accounts until I was actually sued by my creditors. A
state court found the group liable for statutory fraud, ordered it to pay restitution
to clients who completed the program but paid more than they owed, and prohibited
it from doing business with consumers in New York unless it posted a $500,000 performance bond.
The group required clients to authorize electronic debits from their personal bank
accounts in an amount that typically ranged between $300 and $1,000 each month,
depending on the consumers cash-flow and expected settlements. The group told clients that once the funds accrued to a sufficient amount, it would negotiate with
creditors for a settlement. Clients were instructed to stop making credit card payments during this time and to cease all communication with their creditors. The
group did not include most of the program fees it charged in its calculation of the
savings clients would achieve. The fees included the following: $399 for set up;
an amount equal to three times the clients monthly payment for enrollment; $49
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per month for administrative and bank fees; and an amount equal to 29 percent of
the difference between the amount originally due and the settlement amount for a
final fee. The set-up and enrollment fees had to be paid in full before the group
would allow money to accrue for a settlement.
The experience of one New York family exemplifies the harm suffered by the
groups clients. According to a sworn statement the wife gave to state attorneys, the
couple owed about $21,700 in credit card debt accumulated after the husband was
laid off. In 2006, the wife received a call from a telemarketer saying that the Arizona company had looked into her familys credit history and found that it could
cut their credit card debt in half. She and her husband joined the program and
began making $325 in monthly payments to settle five accounts, even though they
were current on their bills. Who wouldnt want to save 50 percent on her credit
cards? the wife told state attorneys. The couple was advised to stop paying their
creditors, which they did after being told by the company that no penalties and interest would accrue as a result. The couple was soon being harassed by their creditors, who called at all times of day, including evenings and weekends. Four of the
couples small accounts were settled during this time. However, the creditor with
the largest balance, which totaled about $19,000, took the couple to court. The pair
withdrew from the program and settled the lawsuit for $28,000, including $9,000
in penalties and interest. They subsequently had to pay this creditor $300 per
month. The wife called this outcome disastrous for us. Nevertheless, the couple received a congratulations letter from the company, saying the pair had paid only
79.3 percent of what was originally owed on the four settled accounts.
Documents that the couple gave state attorneys, however, show otherwise: after
adding the $2,506 in fees they were charged, the pair actually paid more than 140
percent of what was originally owed on the four accounts. The wife told state attorneys that the Arizona company failed our family in every respect, and we are
counted as one of its success stories!
Case Study 2
An attorney and his law firm associates defrauded about 15,000 clients seeking
debt reduction help, causing them to lose millions of dollars and forcing legions of
them to file for bankruptcy. The group lured consumers through television and radio
advertisements, falsely claiming a 50 to 70 percent savings off unsecured debt, an
improvement in credit scores and bankruptcy avoidance. The group, with offices initially in New York and later in Vermont, further promised that if clients did not
receive a settlement, they would be entitled to a full refund. Clients paid fees for
these services and funded escrow accounts from which their creditors were supposed
to be paid. Under the terms of the contract that clients signed, the fees were not
considered earned until consumer debts were settled. The group, however, did not
reduce debt for most of its clients (only 8 percent completed the program, according
to a witness cited by the U.S. Department of Justice) and failed to pay refunds to
many of those who withdrew from the program or were forced into bankruptcy. Instead, the fees collected were used in part to fund huge payments to the attorney
and two of his associates before they provided any services to clients. The client escrow accounts, meanwhile, were drawn upon to cover overdrafts from the law firms
operating account and make payments to the attorneys wife, among other things.
The law firm filed for bankruptcy in 2003. A Federal jury found the attorney guilty
in 2005 on multiple felony counts, including fraud. His six associates pled guilty to
Federal charges.
To enter the law firms debt settlement program, clients signed an agreement that
authorized monthly automatic deductions from their bank accounts. The first four
payments often went into a retainer account to collect advance fees owed to the
firm, despite the fact that the clients had pressing debt problems. The advance fees
equaled about 25 to 28 percent of the total projected savings from the clients debt
settlement plan. Thereafter, about half of payments also were deposited into an escrow account to settle client debts held by creditors until the retainer account was
fully funded. Subsequent monthly deductions went into escrow account until enough
money accrued to make a settlement offer on behalf of the client. Although not formalized in written contract, many clients were instructed to stop making their minimum monthly payments to creditors. They were told that continuing to pay creditors would inhibit the firms ability to reach a settlement.
One of the firms New York clients who Federal authorities interviewed enrolled
in the debt settlement program after hearing an advertisement on the radio. The
woman, who owed $60,000, was experiencing marital problems and feared becoming
a single mother with small children and a large amount of debt. She called the tollfree number and arranged for a meeting at a New York office. One of the firms associates, who later pleaded guilty to interstate transmittal of stolen money and pre-
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paring a false tax return, told her that the advance fees she paid would be held in
trust until all of her debt was settled. She paid about $7,000 to $8,000 to the firm
to settle her debts until one of her creditors obtained a judgment against her, causing her bank account to be frozen. When she contacted the firm to withdraw and
ask for a refund, her calls were not returned. She ultimately filed for bankruptcy.
The firm never secured a settlement on her behalf. She filed a civil lawsuit and won
a default judgment against the firm for $10,000 including attorney fees, but told us
she never recovered any money from the court decision. In relating her experiences
with the debt settlement company, she described the attorney as a ghoul and a vulture . . . preying on vulnerable consumers.
Case Study 3
Two Florida companies and their owners ran an illegal debt settlement business
using unfair and deceptive practices, collecting over $500,000 from about 220 North
Carolinians who rarely obtained the services they purchased and found themselves
in far worse financial positions. North Carolina law prohibits anyone from acting
as a for-profit intermediary between residents and their creditors for the purpose
of reducing, settling or altering debt payments, except in limited circumstances. The
state ban specifically includes situations where an individual is receiving advance
fees to provide these services. To enforce these laws, the North Carolina Attorney
General filed a complaint in February 2008 accusing the group of operating a classic advance-fee scam, designed to extract up-front fees from financially strapped
consumers whether or not any useful services are performed. The companies and
their owners, one of whom was an attorney, marketed their services in part using
numerous third-party referral agents who received compensation for directing consumers to the group. One such referral agent listed a local telephone number which,
when dialed, actually rang a telemarketing boiler room in Massachusetts or Florida. The group and its agents told consumers that their unsecured debts could be
reduced by up to 60 percent in as little as 1 to 3 years and thus avoid bankruptcy.
The group typically charged clients an advance fee of 15 to 25 percent of their total
debt, paid through monthly debits from their bank accounts. It also advised them
to cease all communication and payments to creditors, stating that it could stop any
harassment and provide legal protection. When consumers were sued, however,
the group gave them no legal assistance. They also experienced difficulty in contacting the group and were often put on hold, disconnected, or given the runaround, state prosecutors said. Many clients dropped out of the program dissatisfied. Few received refunds or obtained settlements with their creditors. Many filed
for bankruptcy. A North Carolina court found that the groups actions violated state
law and banned the parties from doing any debt-related business with state residents. State prosecutors ultimately secured refunds for some of the groups clients.
In a separate action in January 2009, the attorney also was disbarred for a period
of 5 years.
An example of the service the groups clients received can be found in the experience of a rural North Carolina couple. According to the wifes sworn statement, the
pair found it increasingly difficult to meet their monthly financial obligations after
the husband became ill and temporarily lost his income. They searched for ways to
reduce their unsecured debt on the Internet and found what turned out to be one
of the groups referral agents. They were told that the initial monthly payment of
about $1,700 would be deducted from their bank account for the first 3 months of
the program to cover attorney fees. Subsequent monthly payments of about $1,200
were to go toward settlements with creditors. The couple joined the program in
hopes of avoiding bankruptcy and made their first installment in February 2007.
Seven months later, the wife called the group for a status on her account and was
told the couple had only accrued about $3,000 in savings, despite paying the group
over $11,000 to date. She also learned that none of their credit accounts had been
settled and they had been charged additional attorney fees of $499 each month.
They withdrew from the program and demanded a full refund, since the group had
done nothing other than take our money with no accountability. The couple started receiving collection notices and threats of lawsuits. Their debts had now increased since they were no longer making payments to creditors. In an attempt to
save their home from foreclosure, the couple filed for Chapter 13 bankruptcy. They
also took second jobs as janitors to help pay off their debts. The wife told us that
during the day she works as a bank teller and her husband is employed as an electrical engineer. One of their creditors suggested they call their state Attorney General. My husband and I are worse off than before we entered into an agreement
with (the group) for debt settlement services, the wife said in her sworn statement.
The state Attorney General ultimately secured a full refund for the couple.
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Case Study 4
A Maryland attorney, his law firm, and their marketers used unfair and deceptive
trade practices to collect $3.4 million from about 6,200 clients over a 2-year period
to settle debt but provided little or no services in return, causing harm to consumer
credit histories and credit scores. The group told its clients that they could settle
debts with creditors for half of the total amount owed, but either did not do so or
negotiated agreements that saved significantly less than promised. Only $811,136
less than a quarter of the money the group collectedwas either paid to creditors
or refunded to clients. Moreover, about $240,000 was taken from client trust accounts to pay for the law firms debt and expenses. The group told clients that its
employees were qualified credit counselors capable of recommending the most appropriate action, but instead it provided virtually the same advice to everyone
enter debt settlement plans profitable for the group. The Maryland Office of the Attorney General began an investigation of the group because it was not licensed to
provide debt settlement services in the state. The group reached an agreement in
2007 with the Attorney General, agreeing to immediately cease and desist selling
unlicensed debt settlement services, pay restitution to customers, and pay investigatory costs and a fine to the state consumer protection office. However, the Attorney
General filed a lawsuit in 2008 against the attorney, his law firm, and their marketers accusing them of continuing to provide debt settlement services, thus violating
the terms of their agreement and the states consumer protection act. The court
ruled in favor of the Attorney General and ordered the group to fulfill the terms
of its previous agreement, pay a fine and costs of $180,000, and pay restitution of
almost $2.6 million. As of March 2010, the attorney had only paid $20,000.
Clients made numerous complaints to the Maryland Office of the Attorney General, detailing the financial harm they suffered from the group. A New Hampshire
couple struggling to pay their bills joined the debt settlement program in August
2007 and authorized the firm to automatically deduct about $650 from their checking account each month, according to a letter they sent to the Attorney General. Although the couple had approximately $41,000 in credit card debt when they joined
the program, the wife told us that they had a good credit history and had never
missed a payment. However, she said that they were told they had to stop making
payments to their creditors when they entered the program. The collection letters
and phone calls from creditors started arriving constantly by the end of September, the couple told the Attorney General. Threats of lawsuits followed 2 months
later. The couple withdrew from the program in February 2008, after paying the
firm $3,895 and receiving no relief from their debts. They told the Attorney General
they were so far in default on their credit cards, with interest and fees added on
top, that they considered bankruptcy to be the best option available to them. According to the wife, their credit score dropped from 720 down to 605 as a result of their
experience with this debt settlement program. She added that they ultimately entered into a consumer credit counseling program after they learned that state law
requires such counseling prior to bankruptcy. When asked to compare the two different debt relief programs, she said that credit counseling is legit and helps consumers to get out of debt, but that debt settlement is a crock.
Case Study 5
Four related California companies lured more than 1,000 consumers into a debt
settlement program through false promises of reducing debt, halting collection calls,
removing negative credit-report information, and holding payments in trust to settle
accountsfrom which, FTC alleged, more than $2 million later went missing. The
companies telemarketers told consumers that the group could cut their debt by as
much as 60 percent in exchange for a nonrefundable fee, thus improving their financial status. The companies did not disclose that the fees typically amounted to hundreds or thousands of dollars. They said that the monthly payments withdrawn
from consumers bank accounts would be held in trust to settle their debt at a reduced amount. Consumers were instructed to immediately stop paying their unsecured creditors so that they would be considered a hardship, putting them in a
better position to negotiate settlement terms. The companies stated that they would
contact the creditors and tell them to cease all contact with their customers, thus
preventing collection calls. They also told consumers that any negative information
that appeared on their credit report would be removed at the conclusion of the program.
FTC filed a complaint against the companies in August 2002, alleging that numerous consumers who enrolled in the program saw their debt increase after incurring
late fees, finance charges and overdraft charges. Negative information often appeared on the consumers credit reportssuch as charge-offs, collections and wage
garnishmentsand will stay on their record for a period of up to 7 years. FTC de-
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termined that in numerous instances, the companies did not contact consumers
creditors or collectors, nor did they return calls. FTC later determined that more
than $2 million the companies collected to be held in trust for making settlements
was missing. Given their worsened financial condition, many consumers ultimately
filed for bankruptcy. The Federal court entered default judgments against all four
companies, banning them from engaging in any debt settlement services and ordering them to collectively pay $1.7 million in restitution to consumers, among other
actions. FTC brought suit against four executives of the companies, but these cases
ended in settlement agreements without any liability or fault established. As part
of the settlements, however, the executives agreed to be permanently banned from
participating in debt settlement services and to pay between approximately
$220,000 and $2.6 million, depending on the amount of consumer injury that
stemmed from their activities. The monetary judgments were largely suspended, except in two instances where the executives surrendered property and other assets
to help satisfy what they owed, because of their inability to repay consumers.
The experience of a secretary from Riverside, Calif., illustrates the harm that FTC
determined the companies to have caused consumers. She joined the program after
receiving an e-mail in August 2000 and being told by a representative from one of
the companies that she could be completely out of debt in 16 months, according to
a written statement she gave to FTC under penalty of perjury. At the time, she
made about $27,000 a year, owed a total of $7,000 in credit card debt and was making little progress toward reducing her balances given that her salary barely covered
rent, food, car payments, and insurance. The company also offered a debt management class, which she stated had appealed to her because she wanted to learn how
to better manage her money. She never received the promised training, though, despite asking for it several times. Three months after she joined the program, letters
from creditors started arriving threatening legal action if she did not pay. Counselors with her debt settlement company told her to ignore them, calling the move
a scare tactic. She started to panic after she received a court summons in late
2000 stating that a lawsuit had been filed against her. A counselor again told her
not to worry, that everything would be OK. After a court summons arrived from a
second credit card company, a counselor told her to fax the documents to the company and that staff would deal with it. The state courts, however, entered two judgments against her in March 2001. She later received notice that her wages would
be garnished by 25 percent. I was frantic, she stated. I was barely making ends
meet on my salary. By July 2001less than a year after the secretary entered the
debt settlement programher credit card debt had more than doubled to about
$15,000, because of late charges, interest, and other fees. She filed for bankruptcy
that same month. She later sued the company that enrolled her in the program and
settled for what she had paid in program fees, about $1,700, plus court costs.
Mr. Chairman, this concludes our statement. We would be pleased to answer any
questions that you or other members of the Committee may have at this time.
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APPENDIX I: DEBT SETTLEMENT COMPANIES
Table 4 below summarizes examples of fraudulent, deceptive, abusive or questionable information provided by the 20 debt settlement companies we called. We have
referred these cases, as appropriate, to the Federal Trade Commission (FTC).
Table 4: Representations Made by Debt Settlement Companies We Called
No.
VerDate Nov 24 2008
Location of
company
and affiliates
Fees a
Association
membership b
Case details
Florida; affiliates in
Florida, Massachusetts, California,
and New Jersey b
Advance fees
based on 15 percent of enrolled
debt, with monthly payments required throughout program.
The Association of
Settlement Companies (TASC);c affiliates in TASC and
United States Organizations for
Bankruptcy Alternatives (USOBA)
Marketing website that referred us to two affiliates

Representative from one affiliate (a member of USOBA)
stated everyone who enters the program makes the independent decision to stop paying their creditors
Identified through spam e-mail message received by one
of our investigators
website advertised New Government Programs! and If
we cant get you out of debt in 24 hours well pay you
$100
Representatives claimed high success rates93 percent
and 100 percent
Representative from USOBA-member affiliate claimed
that worst case scenario for our settlements would be
40 cents on the dollar, and that every single creditor
settles. He also promised that hiring his company would
ensure that calls from creditors would slow down and
eventually stop
Representative from TASC-member affiliate claimed that
TASC was like the SEC for stock traders and serves as
the regulating body for the industry
Owner of company acknowledged TASC logo featured on
website despite company not being a member of TASC
For further details, see section on Company 1 in this
testimony
Unknown; affiliates
in Arizona, Texas,
and Californiab
Advance fees
debt.
First 3 monthly
payments go to
fees.
$25 monthly
maintenance fee.
Additional contingent fee based
on 4 percent of
reduction in debt
company obtains
for clients.
Affiliate in USOBA
Marketing website that referred us to at least three affiliates

Representatives from two affiliates told us we would not
make our monthly payments to creditors while in the program
Representative from one affiliate told us we could not afford debt settlement and suggested that we consider
bankruptcy as an alternative
website advertised Reduce balances to 40 percent60
percent, Eliminate excessive Credit Card Debt interest
immediately, and End late payment fees [sic]
Companys radio advertisements claimed government
approved and government authorized debt settlement
Representative from one affiliate stated creditors would
send letters to us indicating that our settled accounts are
considered paid in full
testimony
California
Advance fees
First 3 monthly
payments go to
fees.
$100 fee for outof-state clients.
TASC (at the time

of our call)
website targeted at Christian consumers

Multiple representatives told us we would not make payments to our creditors once we entered companys program
Representative told us that stopping payments to our
creditors would knock [our credit score] down a couple of
points, and that our credit would only be affected while
we were in the program
Representatives claimed that program has 85 percent
success rate, that lawsuits from creditors were just random and did not require an attorney, and that they
would negotiate our debt down to 40 to 60 percent of
what we owed
Representative told us that creditors would report our accounts settled for less than the full balance as paid in
full or paid as agreed
Owner told us during our site visit that the company recently dropped its TASC membership due to rising costs
testimony
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Table 4: Representations Made by Debt Settlement Companies We CalledContinued
VerDate Nov 24 2008
No.
Location of
company
and affiliates
Fees a
Association
membership b
Case details
California
Advance fees
First 3 monthly
payments go to
fees.
$840 maintenance fee (total
throughout program).
$623.50 trust account fee (total
throughout program).
TASC
Company advertised U.S. National Debt Relief Plan,

with a logo depicting a shield filled with a U.S. flag
Representative stated that, upon entering the program,
we would no longer be making payments to your creditors on a monthly basis
Representative justified first 3 monthly payments going
only to fees as necessary because it covered initial set-up
costs and to show that you have the commitment to be
in the program
testimony
California
Advance fees
debt.
TASC (at the time

of our call)
Representative told us we were too poor for debt settlement and advised us to consider bankruptcy as an alternative; later described companys debt settlement program
Representative stated that we could not continue paying
our creditors while in companys program
After our undercover call but prior to release of this testimony, company appears to have gone out of business
testimony
Texas
Advance fees
debt, with monthly payments required during
first 24 months
(program length
unknown).
Unknown
Representative stated that One-hundred percent of our

clients stop making those [credit card] payments in
order for program to work; later directed us to divert
money from paying creditors to account from which company withdraws fees
Representative advised us to give companys telephone
number to creditors as our telephone number, to avoid
calls from creditors
Representative stated basically what we do is . . . we
negotiate with your creditors to basically cut your bills in
half. So when we go to negotiate, we go to negotiate at 50
cents on the dollar. Thats what we guarantee. Now, we
can also get less, and added as an example one major
bank that he claimed normally settles for only 30 cents
on the dollar.
Represented their program could prevent creditors from
suing us or garnishing our wages
California
Advance fees
first 12 months
(of estimated 38month program).
Unknown
Advertises National Debt Relief Stimulus Plan

Representative told us we would stop paying our creditors, and that the only thing youre going to have to
worry about is this payment here [companys fees]
Representative stated that lawsuits were a scare tactic
website states it can Prevent Creditor Harassment
Representative claimed company could reduce our balances so that we would pay anywhere from 30 to 60 percent on what you owe
Texas
Advance fees
first 15 months
First 4 monthly
payments go to
fees.
TASC
Regarding payments to our creditors, representative stated youre gonna have to cut them off so that they havent
received anything
Representative claimed every account that we work on
will be at least 40 cents on the dollar
Texas
Advance fees
first 12 months
Unknown
Representative stated that one-hundred percent of our

clients stop making their monthly payments as soon as
they enroll into the program
Representative encouraged us to explore other debt relief
options as well as debt settlement
Name of company changed during our investigation
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VerDate Nov 24 2008
No.
Location of
company
and affiliates
10
Fees a
Association
membership b
Case details
Texas
Advance fees
based on 17 percent of debt, with
monthly payments required
during first 19
months (of estimated 48-month
maximum program).
USOBA
Representative stated that upon enrolling in companys

program you would no longer make any of your credit
card payments. All of them would go late
Representative claimed to negotiate your debt down to
50 percent or less of what you owe
Representative said advance fees paid for attorneys who
would look at our account monthly
Representative was unable to explain refund policy by
telephone
Representative suggested we change our address on billing statements to address for companys attorneys
11
Florida
Unknownonly
received recorded
information.
Unknown
Telephone number listed on website went to a 7-minute

recording
Recording stated that we would stop paying our creditors
upon entering program
Recording claimed to send letters to credit bureaus that
would remove any late marks that you may have received on the account
12
California
Advance fees
debt.
Unknown
Front-end marketing company, with 28 different websites

used to solicit customers for referral to one debt settlement company
Representative stated that affiliate handling actual settlement process would call us back; we did not receive a
return call
13
Texas
Advance fees
USOBA
Representative stated that program does not work for everyone, but does work for everyone who has a hardship
Representative stated companys services are helpful to
consumers because we allow [consumers] accounts to go
delinquent and past due and into collections
An e-mail sent after our call stated that upon enrolling in
the program, we will inform your creditors that you will
no longer be making payments on the accounts
14
Arizona
Advance fees
based on 12.9
percent of enrolled debt, with
monthly payments required
during first 10 to
12 months (of estimated 30-month
program).
Unknown
Representative stated that 9 out of 10 of our clients are

current, but stop making payments when entering program
When asked whether to stop paying accounts that are
current, representative replied Absolutely
15
California
Advance fees
debt.
First 3 monthly
payments go to
fees.
$30 monthly
maintenance fee.
$14.50 monthly
trust account fee.
TASC
Representative stated that she could not interfere with

our obligation to pay our creditors, and encouraged us to
continue making payments if we could afford to do so at
the same time as saving for settling debts
Representative later stated that if we could continue
making our minimum payments maybe this [debt settlement] isnt the best solution for you
16
Florida
Contingent fees
USOBA
based on 35 percent of reduction
in debt company
obtains for clients.
First monthly
payment goes to
enrollment fee.
$53 monthly
maintenance fee.

Representative stated that you stop paying everybody.
Thats what makes you qualify. You fall behind.
Companys contract states there is a $1,000 termination
fee for dropping out of the program
Representative suggested that we could pay our initial
fee with a credit card
Representative offered to also provide us information on
debt consolidation loans, to determine which option would
be best
17
California
Advance fees
first 18 to 24
months (of estimated 36-month
program).
Representative encouraged us to take care of our late

mortgage payments before worrying about paying off or
settling our credit card debts
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No.
Location of
company
and affiliates
18
Fees a
Association
membership b
Case details
Unknown
Advance fees
First 3 monthly
payments go to
fees.
Unknown

website describes one of the blessings of its program as
Immediate increase of spendable cash-flow [sic]
Representative told us the program is based on our stopping payments to creditors
19
Maryland
Advance fees
debt.
$9.85 monthly
bank fee.
Unknown
Representative stated that it wouldnt make sense to

continue making payments while in a debt settlement
program
Representative said that program works for some but is
not great for others, and that company discourages consumers from debt settlement if they plan to buy a house
soon, due to credit score damage
20
California
Unknownrepresentative said
we did not have
enough debt to
qualify for program.
TASC
Representative stated that we did not have enough debt

to qualify for the companys debt settlement program
Source: GAO analysis of information obtained from debt settlement companies.

a Fee information reflects fees disclosed to us; some companies may charge additional fees that were not disclosed. Debt settlement
companies typically charge fees requiring payments either at the beginning of the program as an advance fee or after each settlement
as a contingent fee. Some companies structure the payment of advance fees so that they collect a large portion of themas high as 40
percentwithin the first few months regardless of whether any settlements have been obtained or any contact has been made with the
consumers creditors. Others collect fees throughout the first half of the enrollment period in advance of a settlement. Companies that
charge a contingent fee generally base it on a certain percentage of any settlement they actually obtain for consumers. They sometimes
charge a small, additional fee every month while consumers are busy attempting to save funds for settlements. FTC has criticized advance fees, stating that consumers often suffer irreparable injury as a result of paying them in advance of receiving services. The agency maintains that the practice of taking fees before a settlement is obtained results in a number of adverse consequences for consumers: late fees or other penalty charges, interest charges, delinquencies reported to credit bureaus that decrease the consumers
credit score, and sometimes legal action to collect the debt.
b Some companies we called referred us to one or more affiliates. It was not always clear to us exactly with which company or affiliate we were speaking, where the companies or affiliates were located, or what the relationships were between the companies and affiliates. In some cases, separate affiliates of the same company claimed to be members of different industry trade associations.
c While Company 1 claimed to be a member of TASC, it appears this was a false representation.
The CHAIRMAN. Do you have, incidentallythere are several of

those comments which I couldnt understand. Do you have text
which is available?
Mr. KUTZ. Yes, we do.
The CHAIRMAN. We have text.
Mr. KUTZ. Yes.
The CHAIRMAN. OK. I justI want to have that.
Mr. KUTZ. OK.
The CHAIRMAN. I thank you very much.
And now, we will turn to The Honorable Julie Brill.
Well, IIm just doing it in order of what I see here. Im not
going to be stage-managed, OK?
[Laughter.]
The CHAIRMAN. I will be stage-managed.
[Laughter.]
The CHAIRMAN. Mrs. HaasMr. and Mrs. Haas. Youre of Concord, New Hampshire.
Mrs. HAAS. Yes, I am.
The CHAIRMAN. And please proceed.
STATEMENT OF HOLLY A. HAAS, CONSUMER
Mrs. HAAS. Thank you, Chairman Rockefeller and Ranking Member Hutchison, for inviting me to speak with you today about my
experience with debt settlement.
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I live in New Hampshire with my husband of 17 years. I have
three sons and one grandson. My son served proudly with the U.S.
Navy until 2009.
In June 2007, our credit card interest rates were increased. The
credit card company told us our debt-to-income ratio was too high,
and that justified an increase, even though we were current. These
increases made it difficult to meet our monthly budget, due to dramatic increases of our monthly payments. We were never late on
our payments, but we needed help to reduce them.
In July 2007, after watching TV commercials on credit counseling, we started researching credit counseling companies on the
Internet. We found one, in particular, that was close to home in
Massachusetts: Consumer Credit Counseling of America; and because it had America in it, we thought we couldnt go wrong.
We called CCCA and spoke with a man named Tom Roy, who
talked to us about credit counseling, but, because of our credit card
balances, he persuaded us to do a debt settlement. For a fee, they
could get us an attorney, that they selected, who would work to settle our debts. In the end, we would pay 46 percent of our debt and
a retainer of $7,500. This would cut our credit card payments in
half. Forty-eight payments would go into an account and would be
used to pay the attorney and the settlements. After trying to work
with our creditors, to no avail, this sounded like a better option for
us.
On August 4, 2007, we received the contract and sent it back,
signed, along with the checking info for the installments. We were
instructed by the CCCA not to pay our credit card bills, because
the credit card companies would not negotiate settlements with
current accounts. By September, the collection letters and calls
started. Money was going into our holding account, and the attorney that Consumer Credit Counseling of America put us in touch
with started taking his fees.
The attorneys name was Richard A. Brennan. We heard nothing
from him, so we researched our attorney on the Internet. To our
dismay, we found numerous serious complaints about him.
Afraid that we were being scammed, we called Brennans client
services number, as instructed on the contract, for questions, which
we thought was Brennans office staff. But, it turned out to be a
totally separate entity in Boca Raton, Florida. The person assured
us that our case was being handled properly, so we continued with
Brennan to help us with our debt.
In November 2007, we called client services, due to collection
threats. They no longer handled Brennans cases, and referred us
to a number in Maryland that no one answered; the voice-mails
were always full. We called client services again, who said the
creditors agreed to settle our credit card debt at 80 percent. In reality, nothing was being done on our case and the attorney was
still taking our money from our account.
In February 2008, we got a call from Howard Lee Schiff, a law
office hired by Sears credit. They were going to sue us. We told
them that we had a lawyer and that they needed to contact him.
We again called client services, and the woman told us they no
longer instructed clients of Richard A. Brennan, again giving us
the contact number that gets you nowhere.
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We decided to Google his name. The complaints were worse. The
Better Business Bureau rated him an F, and the AG of Maryland
had reached a settlement with him to discontinue debt settlement
practices, but the attorney was still practicing debt settlements.
After learning this, we realized we had to stop working with him
immediately. We then faxed a letter to the bank that had the holding account, and told them to stop all payments to Brennan, and
to stop all transfers. We immediately closed our checking account,
for fear that they would still take the money out anyway. The next
day, we sent a letter to the attorneys office, terminating his services.
On February 25, 2008, we consulted with an attorney in New
Hampshire, to see if we could undo the damage that Brennan
caused. We were now so far in default that we thought our only
option was bankruptcy. At our consultation, we found that neither
Consumer Credit Counseling of America nor Brennan was licensed
for debt adjustment in New Hampshire, making our contracts with
them illegal. He said we should formally complain to the AGs offices in New Hampshire and in Maryland, and the New Hampshire
Banking Commission, which we did.
There is now an order to cease and desist in New Hampshire,
and the AGs office in Maryland had Brennan disbarred from their
State.
Our New Hampshire attorney told us about Consumer Credit
Counseling Service of New Hampshire and Vermont, a licensed,
nonprofit company that is affiliated with the credit card companies
to help manage debt. We joined the program on March 10, 2008.
In 6 months time, we were about $13,000 behind from where we
started. Our credit scores had gone from excellent to poor. All credit extended to us now is at a higher rate, if at all, and banks who
once gladly financed our cars wont look at us. Insurance companies
have given us a higher quote, due to theirour credit history.
Debt settlement companies are very misleading. They have no regard for State or local laws. Debt settlement is much different than
debt management. As we now know, a debt settlement plan does
extreme damage to your credit. And in our opinion, they dont work
and shouldnt exist.
In 2 years, we have paid about $32,000 toward our credit cards,
and we now owe approximately $34,000. If we started with a legitimate company first, our current debt would be about $13,000. We
would have paid off our credit cards in April 2011. With our current payment plan, we will be debt-free October 2012.
Now, we dont spend beyond our means. If we want to buy something, we save up first and we do not use credit cards at all.
Thank you.
[The prepared statement of Mrs. Haas follows:]
PREPARED STATEMENT
OF
HOLLY A. HAAS, CONSUMER
After numerous years of unrequested credit limit increases from our credit card
companies and them sending us checks with our monthly statements to use for credit, in June 2007, we noticed an increase in our interest rates on our monthly statements. After calling the credit card company, we were told that our debt to income
ratio was too high and that justified an increase in rates. This was in spite of the
fact that we were making payments on time. Increased rates made our payments
higher and this is what made it difficult to pay these cards off.
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My husband and I, realizing our ever increasing financial debt with credit cards,
were paying more than what we could afford in credit card payments and needed
some advice in how to reduce them in some way to make it easier to pay our necessary bills without struggling each month. We were never late on any of our credit
card payments at this time.
In late July 2007, after researching debt management companies on the Internet,
we called Consumer Credit Counseling of America, (CCCofA) 1060 Osgood Street,
North Andover, MA to get more information on debt reduction. We chose this company because it was the closest we could find from our home in Concord, NH and
we thought they were credit councilors to help manage our debt. The representative,
Tom Roy, asked us about our credit card balances and assured us that there were
options for us, either reduction or settlement. First he talked about credit counseling where they would set up a payment plan with the creditors and help reduce
the interest rates. However, he thought that it would be better for us to do a debt
settlement plan. For a small referral fee to fill out the paperwork they could get
us an Attorney who would work for us to settle our debts with the credit card companies. For our total debt of $48,648 we would be paying forty-six percent (46 percent) or $23,821 and an attorney fee of $7,500 for a total sum of $31,321. This would
reduce our monthly payments from $1,327 a month to $653 (estimate) for a period
of 4 years. The monthly payments would go into a bank account which they would
set up for us. The money in that account would collect over time and be used to
pay the attorney and the settlements for each of the creditors we had. They told
us that their attorney (unknown at the time) would pay them off as he got word
that the credit card companies agreed to settlement with the money accrued in the
account. After trying to work with all of our creditors beforehand about reducing
the interest rate and being denied, this sounded like a better option for us at the
time.
Once we agreed to go with the debt settlement and Consumer Credit Counseling
of America sent out our contract in the mail, this was the last time we ever could
get a hold of Tom Roy. They gladly took $400 electronically from our checking account for their referral fee. It took about 2 weeks to get the contract.
Finally, on August 4, 2007, we received the contract in the mail, read and signed
it and sent it by fax back to Consumer Credit Counseling of America, along with
our checking account information for the monthly installments and a hardship letter
to our creditors, as instructed. During that time, we were verbally instructed not
to pay our credit card billswhich were not overdue at that time, because the credit
card companies would not negotiate settlements with current accounts. If the credit
card companies or collection companies called, we were told to say We are not neglecting our debts, we have hired an attorney. Please call (the number) for more information. We were instructed to fax all collection letters to our attorney, which
we did. (Exhibit A)
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Exhibit A
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43
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By the end of September 2007, the collection letters and phone calls started arriving, money was going into our Global Client Solution Banking Services at Rocky
Mountain Bank and Trust (Exhibit B) account thru electronic transfer and the Attorneys office was surprisingly now taking our money out of our holding account
automatically for his fees ($649.13 each month for August and September). We still
had not spoken to or heard from our Attorney. After calling the client phone number provided to us in the beginning to no avail and finding out who he was from
our contracts business heading, we decided to research about him on the Internet
to get more information about him. To our dismay, we found numerous serious complaints about our attorney.
44
Exhibit B
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Shocked to think that we were being scammed and afraid that wed lose everything we owned, we called the client number at the Client Services Department.
The person on the other end in Boca Raton, FL, assured us that our case was being
handled properly. We had requested at that time, that we get a copy of all correspondence to and from the creditors and the attorney from the date of the agreement until now. They agreed and said they would. About a week after that, the only
copies we got were the Cease and Desist Communications and the POA for the
companies we carried credit cards with. They were dated 92507. Wanting to believe in the good of people, we continued with this Attorney to help us with our ever
growing financial mess.
In November 2007, we again called our Attorneys Client Services Department
due to threatening collection letters, calls and threats of lawsuits. The Client Services representative told us that they no longer handle Richard A. Brennan s cases
and referred us to a number in Maryland that when called it just rang and rang.
No one ever answered the call. When we tried to leave a message for the paralegal,
45
the voice mailbox always said it was full. We were just like the 1000 or so other
people who wrote complaints about the attorney on the websites. We again called
the Client Services representative in Boca Raton, FL and told them that no one was
answering the phone and that we were really concerned and he asked what our
questions were. We told him that we didnt think anyone was working on our debt
settlement case and he said that they got information from all creditors reducing
our debt to 80 percent. (We feel that he just told us that to appease us.) Relieved,
we asked him to send copies of those letters as we had already requested all copies
of correspondence. He said he would. To this date, we never got those letters. At
this time, nothing was done on our case and they were still withdrawing money
from our account each month and the attorney was still taking money from our
holding account. (Exhibit C)
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Exhibit C
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46
47
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In January 2008, we continued to get collection letters from creditors and we were
still faxing them to the number they provided us in the contractual agreement. We
continued to try to call the Frederick Law Group, LLC, now in Maryland, to get
some information on our file to no avail, but continued to not pay any credit card
bills as instructed. By now, our credit cards were over limit (with fees), overdue
(with fees) and interest charges sky-rocketed and the Attorney was still taking our
money.
On February 19, 2008, we got a call from a Law Firm representing a creditor.
They were going to sue us. We told them that we had a lawyer representing us and
that they needed to contact them. The lady commented that the file doesnt show
that we have an attorney and took the information and hung up. Immediately, we
called the number our contractual statement first provided us. The woman told us
the same thing. They no longer instruct clients of Richard A. Brennan, again giving
us the contact information that gets you nowhere.
Upon trying to call this Attorney, we once again decided to Google his name. The
complaints were worse, the Better Business Bureaus rating of this business is an
F, and we found where the Attorney General of Maryland had reached a settlement
with him but the Attorney is still fraudulently scamming hundreds of debt-stricken
48
people. (Exhibit D) This settlement occurred unbeknownst to us, a month or so after
we signed our contract with him. According to an on-line report the attorneys company we were working with in Boca Raton, was out of business as of October 2007.
We never received any notice of this and he still took our money each month.
Exhibit D
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On February 19, 2008, my husband faxed a letter to the company that is in

charge of taking out our money and told them to terminate our account and stop
all direct payments to the account. We immediately closed our checking account for
fear he would still take the money out anyway. (Exhibit E)
49
Exhibit E
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On February 20, 2008, we faxed a letter to the Attorneys new office in Frederick,
MD, terminating his POA over our creditors and terminating his (lack of) services
due to breach of contract. (Exhibit F) To this date, Attorney Brennan s office has
sent us two more blank contracts to fill out to continue the debt settlement with
him that we started back in August 2007, even after he was fired. We still cant
believe how bold this rip off artist is.
50
Exhibit F
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On February 25, 2008, we had consulted with an Attorney here in Concord, NH

to see if we could undo the damage that this scamming Attorney caused us. We
were now so far in default that we thought our only option was bankruptcy. (Exhibit
G) It was at this time that we found out that any company doing debt adjustments
must be licensed with the State of NH. Neither Consumer Credit Counseling of
America nor Richard A. Brennan was licensed in NH. Thereby making our contract
with either of them illegal and making the fee Consumer Credit Counseling of
America retained also illegal. He told us that we should write letters to the Attorney
Generals Offices in NH and MD and the NH Banking Commission, which we did
2 days later. (Exhibit H) There is now an order to Cease and Desist here in NH
along with paying back Consumer A, which is us. (Exhibit I) The Attorney Generals
Office in MD has managed to Disbar Richard A. Brennan from ever practicing law
in the State of Maryland. (Exhibit J)
This Concord, NH Attorney also told us about a program in town that is a licensed, legitimate non-profit company and is affiliated with the credit card compa-
51
nies. Anyone who filed for bankruptcy in NH must use this program for 6 months
before filing anyway so we joined the program in hopes that we didnt have to file
bankruptcy. On March 10, we signed an agreement with Consumer Credit Counseling Service of NH and VT to have them help manage our credit card debt. (Exhibit K) At that time, our credit card debt had increased from $48,648 to $57,236
a difference of $8,588. This was not including the $3,895.08 we paid Attorney Brennan, so now we were $12,483 behind from where we started. Our credit card companies refused to take off the interest charges and fees due to our issue with Richard
Brennan and to date we are still working with Consumer Credit Counseling Service
of NH and VT to pay off our credit cards balances.
The far reaching affects from what this debt settlement lawyer did to us; is our
credit scores have gone from excellent to poor; All credit extended to us now is in
the higher interest rate bracketif at all. Banks who financed our cars and we had
in good standing with, wont look at us to finance another if we ever needed too.
We cant refinance anything at lower rates, including our mortgage. Auto insurance
companies have given us higher quotes due to our credit history.
What we have learned from our experience is; Debt Settlement companies have
business names very similar to the real ones, so its hard to tell who is legitimate
and who isnt. Debt management is much different then debt settlements; these
debt settlement companies will tell you the key words that you want to hear, like
reduce debt/payments in half, first step toward building wealth, build a bank
account with liquid assets you never thought possible, pay off your debt in 4
years. They are in business to make money, they are not in business to help consumers with financial debt problems, they have no regard for State or local Laws
and in our opinion they dont work.
We have read the book by Dave Ramsey, Total Money Make Over and have followed his debt free living to the letter. Weve learned that in order to get our heads
above water and stay above water, we dont spend beyond our means; if we want
to buy something, we must save a little each pay period and pay with cash when
we have saved enough. We try to put more toward our credit card debt to get them
paid off faster but that doesnt always happen each month. Since we started with
CCCS of NH, we have not used credit cards even for Christmas or birthdays. When
we first started with CCCS of NH we had $57,236 in debt. In 2 years we have paid
$31,895 toward our credit cards and now owe approximately $34,037.
If we had started with a legitimate debt management company first, put what we
paid Atty. Richard A. Brennan toward our debt, our current debt would be approximately $12,858. This means we would be completely credit card debt free in April
2011. With our current payment plan we will be debt free October 2012.
The CHAIRMAN. Thank you very much. Thats a stunning, stunning experience.
Mr. Phil Lehman, Assistant Attorney General in the Office of
North Carolinas Attorney General, Consumer Protection Division,
Raleigh, North Carolina.
We welcome you.
STATEMENT OF PHILIP A. LEHMAN, ASSISTANT ATTORNEY
GENERAL, NORTH CAROLINA DEPARTMENT OF JUSTICE
Mr. LEHMAN. Thank you, Mr. Chairman. I appreciate the opportunity to appear before the Committee.
And, as you said, Mr. Chairman, this is a very important and
timely consumer protection issue, and one that is a very high priority for the attorneys general around the country, particularly in
these very difficult economic times, when consumers are overwhelmed with debt and looking for ways out that are legitimate
and that work.
Before I continue with my remarks, Id like to follow up on what
Mr. Kutz and what Mrs. Haas testified to. And I can tell you, as
someone working in an attorney generals office, that the stories
they told are not isolated examples. I, along with my colleagues
around the country, hear these kind of stories every day. Its a very
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serious problem, and what they talked about, again, is not uncommon.
Unfair and deceptive practices in the marketing and delivery of
debt settlement services continue to be a major problem for consumers and for law enforcement. Financially distressed consumers
are looking for help in managing their debt burdens. Unfortunately, too many of them have fallen prey to unscrupulous debt settlement companies. These companies advertise heavily on television and on the Internet. They make grandiose promises that
they can cut consumers debt burdens in half and leave the consumer completely debt-free in 12 to 36 months.
The reality is far different from the rosy view thats painted in
these commercials. In the view of the attorneys general, deceptive
conduct in the sale of debt settlement services is widespread. In
our view, this is not a case of a reputable and beneficial industry
that is marred by a few bad apples.
Last October, 41 State attorneys general joined in comments in
support of the Federal Trade Commissions proposed rule on the
sale of debt relief services. The comments noted that complaints to
AGs offices had more than doubled since 2007 and that the States
had brought more than 128 enforcement actions against debt relief
companies. The attorneys general reported that too many consumers have paid substantial fees for debt settlement services that
were often not provided.
We identified a number of very specific, serious problem areas
that regularly occur in the debt settlement industry. These are,
first, as we have just heard, there are widespread deceptive representations in the sale of debt settlement services. In our experience, consumers are regularly misled about the likelihood of getting
all their debts settled, the length of time it takes to get any debt
settled, and the amount of money it will cost them as fees.
Second, another major problem is the failure of debt settlement
companies to inform consumers about the negative consequences of
the debt settlement process. Based on what consumers have told
us, there are many pitfalls with debt settlement programs. Consumers are directed not to communicate with or make payments to
their creditors. When that happens, collection efforts intensify.
Debt balances balloon due to default interest rates and late fees.
The consumers credit standing will continue to deteriorate. Collection lawsuits and wage garnishment actions may follow.
And we have heard from the banking industry that they do have,
and would like to offer, options to consumers who are overwhelmed
with debt, but they cant, because consumers are told not to talk
to their creditors and not to make payments.
The third problem, and a very significant one, is the charging of
significant advance fees before any real services are delivered and
before any results are obtained. By the industrys own admission,
the majority of consumers drop out before debt settlements are
completed. Since these fees are front-loaded, the debt settler gets
paid whether or not it completes any settlements. There is little incentive to perform with this advance-fee model. If the debt settler
does not perform and the consumer drops out after 6 months, the
debt settler keeps the fees that it has collected, even though the
consumer has obtained no benefit.
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This is why the attorneys general that supported the FTC comments support a prohibition on the collection of advance fees for
debt settlement services. We believe that the elimination of advance fees is the key to cleaning up this industry.
My State, North Carolina, has already taken that step. In 2005,
our General Assembly enacted an advance-fee ban for debt settlement services. It has worked well, both for enforcement purposes
and to limit debt settlement abuses.
Debt settlement companies can, and do, operate without charging
very large advance fees. Weve been informed by two major national companies that they can do business in North Carolina and
that they can continue to do business by collecting fees only after
successful settlement of debts. I know the debt settlement industry
strongly opposes any prohibition or serious limitation on advance
fees, but it is not, as they claim, a death sentence for the industry.
One other thing I would like to mention is that, despite our
Northvery strict North Carolina lawa problem that was highlighted by Mrs. Haas is that attorneys are now getting into this
field, and we have seen a number of examples where attorneys are
used as fronts by debt settlement companies to get around State
regulatory laws. In many States, including ours, licensed attorneys
are exempt from both the debt settlement laws and, generally, from
our unfair and deceptive practices laws.
The CHAIRMAN. Can you further explain that, sir?
Mr. LEHMAN. Yes, Id be happy to. The debt settlement industrythe services areI would describe them as very segmented.
As Mrs. Haas testified toshe responded to an ad by Consumer
Credit Counseling of America. That is not a debt settlement company, it is a lead-generator. And the lead-generators then refer the
consumer to somebody. In our case, in North Carolina, since debt
settlement with advance fees is illegal, lead-generators may refer
the consumer to a law firm, an out-of-state law firm. The law firm
is there in name only. When the consumer signs the agreement, its
in the name of a law firm. Its a law firm retainer. So, the consumer thinks theyre getting a law firm to represent them, which
also would mean representation in the event of a lawsuit. And so,
it gives the consumer an added comfort zone that they wouldnt get
from a commercial debt settlement company.
The fact of the matter is, the law firm does none of the work. All
of the customer service, negotiation, accounting, and management,
is handled by an outsourced debt settlement provider. So, the law
firm is there in name only, and they then contend theyre not subject to State laws. They do not want to respond to subpoenas, because of attorney-client privilege, and so on. But, that is a fairly
new problem, and I think its done as a way to get around State
laws.
In our State, weve had two litigated cases against law firms and
a settlement in another case where a law firm was involved. So,
yes, it is a problem.
Those are my remarks, Mr. Chairman. Id be happy to answer
any questions. And I can speak on behalf of other attorneys general
offices, that we greatly appreciate the attention that you and your
committee are giving to this very important issue.
Thank you.
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[The prepared statement of Mr. Lehman follows:]
PREPARED STATEMENT OF PHILIP A. LEHMAN, ASSISTANT ATTORNEY GENERAL,
NORTH CAROLINA DEPARTMENT OF JUSTICE
Chairman Rockefeller, Senator Hutchison, and members of the Committee, my
name is Phil Lehman. I am an Assistant Attorney General in the Consumer Protection Division of the North Carolina Department of Justice. I have served in that capacity for 22 years and have specialized in litigation and legislation relating to consumer credit and credit fraud. I appreciate the opportunity to appear before the
Committee and to share my experience about consumer protection issues relating
to the business of debt settlement.
I. Unfair and Deceptive Practices in the Offering and Performance of Debt
Settlement Services are Widespread and are a Major Consumer
Protection Problem for State Attorneys General
Consumer abuses in the marketing and delivery of debt settlement services have
been a major consumer protection problem for state attorneys general. The problem
is particularly acute in the current economic downturn when many consumers are
overwhelmed with debt, are delinquent in credit card payments, and are looking for
legitimate ways to cope with their debt burden. Unfortunately, too many of these
consumers fall prey to unscrupulous debt settlement businesses that make grandiose offers of debt reduction but deliver little relief. In our experience, most consumers are worse off after enrolling in debt settlement programs. Typically, consumers debt balances increase with added interest, their payments are diverted to
the debt settlement company instead of the creditor, and collection efforts, including
legal action, are stepped up against the consumer.
Last October, the National Association of Attorneys General (NAAG) submitted
comments on behalf of 41 attorneys general to the Federal Trade Commission in
support of the FTCs proposed Rule on Debt Relief Services.1 The attorneys general
noted that unfair and deceptive activity in the debt settlement industry was widespread. Citing the fact that consumer complaints had substantially increased and
that attorneys general had filed over 128 enforcement actions against debt relief
companies, the comments welcomed the comprehensive regulatory initiative proposed by the FTC:
The States view the eradication of unfair and deceptive practices in the debt
relief industryand the harm caused to consumers and the marketplace by
these practicesas a consumer protection priority . . . [The States] submit that
the comprehensive bright line approach reflected in the proposed rules would
substantially aid law enforcement agencies in addressing the harms that have
been caused to consumers by unscrupulous practices in the debt relief industry.
In the comments, the attorneys general described some of the prevailing problematic debt settlement practices based on information obtained from cases and numerous consumer complaints:
1. Deceptive solicitations, including unsubstantiated claims of consumer savings
and the length of time required to complete the program. (See sample solicitations attached as Exhibit 1.)
2. Failing to adequately inform consumers that collection efforts, including lawsuits, will continue against them due to the extended nonpayment of consumers
accounts while in the debt settlement program and that the consumers credit
standing will deteriorate. (Sample solicitation: Youll avoid bankruptcy, put an
end to harassing phone calls from creditors, and allow your credit score to dramatically improve.)
3. Failing to adequately inform consumers that before debts are settled, the balances on their credit accounts will increase significantly due to accumulating interest and late charges. (Default rates on credit card accounts can be as high
as 30 percent, so a consumers $10,000 debt could rise to $13,000 after 1 year
of nonpayment.)
4. Lack of adequate screening and individual budget analysis to determine
whether a debt settlement program is suited for the consumer.
1 FTC Notice of Proposed Rulemaking to amend the Telemarketing Sales Rule to address the
sale of debt relief services, 74 Fed. Reg. 41988 (Aug. 19, 2009). The comments submitted by
NAAG are available at http://www.ftc.gov/os/comments/tsrdebtrelief/54367000192.pdf.
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5. Deceptive disparagement of consumer credit counseling services and bankruptcy, which are often more effective alternatives for the consumer.
6. The collection of substantial advance fees before any meaningful services are
rendered, so that the debt settlement company profits even if the consumer receives no benefits. (Fees typically range from 15 percent to 18 percent of the
consumers debt, and are collected in the earlier months of the program before
settlements are concluded.)
7. Advising consumers to cease payments on their credit accounts and to cease
communications with their creditors.
8. Failing to provide regular information to consumers about collection of fees,
status of debt settlement accounts, and communications with creditors.
The consumer protection problems in the area of debt relief services are not limited to a few bad actors; they are pervasive throughout the industry. The whole
premise of debt settlement is based on consumers not paying their debts and not
communicating with creditors, i.e., essentially encouraging breach of contract. The
theory is that the older and more delinquent the debt, the easier it will be to negotiate. Only after sufficient funds are accumulated in the consumers settlement account (after deduction of fees), which can take a year or more, the debt settler may
initiate some settlement negotiation activity. Consumers are taking a big risk, while
interest charges mount and the debt settlers fees are being collected, that they will
eventually get relief from all their debts.
During the extended period of time while consumers are making payments to
their debt settlement accounts, problems are likely to arise. Creditors have not
agreed to any debt relief plan, they are not receiving any payments, and they are
blocked from offering debt resolution options directly to their customers. These
months of nonpayment and non-communication lead not only to increased debt, but
also to increased collection efforts and legal action.
Further, a significant portion of the consumers initial payments is diverted to the
settlement companys fees.2 If the consumer drops out before the settlement process
is concluded, as is usually the case, he or she will lose the fee payments, while facing increased debt account balances.3 The debt settler therefore profits whether or
not it accomplishes anything for its client.
Because of these rampant consumer abuses in the debt relief industry, 41 attorneys general specifically support the FTCs proposal to prohibit debt settlement companies from collecting advance fees. The advance fee ban, while opposed by much
(but not all) of the debt relief industry, is the key to preventing fraud and ensuring
that debt settlement services will be performed. There is precedent for such an advance fee prohibition, particularly for suspect services that purport to help distressed debtors. The Federal Credit Repair Organizations Act, 15 U.S.C. 1679b(b),
and many similar state laws prohibit credit repair businesses from charging fees
until all promised services are fully performed. Similarly, the Telemarketing Sales
Rule, 16 C.F.R. 310.4 (a)(4), prohibits advance fees for loan brokering services, another business activity characterized by deceptive promises and minimal performance. Many states prohibit advance fees for foreclosure relief and mortgage loan
modification services because of widespread consumer fraud in the offering and delivery of those services. The FTC is also recommending an advance fee prohibition
in its proposed Rule on Mortgage Assistance Relief Services (75 Fed. Reg. 10707,
March 9, 2010).
2 Attached is a copy of a payment schedule offered to a North Carolina consumer by Heritage
Debt Relief in December 2009. It calls for the payment by the consumer of $6,906 in fees to
Heritage. The consumer has to make monthly payments of $575 for an unspecified period of
time. The consumers first 5 monthly payments of $575 are allocated entirely for Heritages fees,
followed by half ($287.74) of the next 14 months payments.
3 A study published by the Colorado Attorney Generals Office based on annual reports submitted by debt settlement companies from 2006 through 2008 revealed that only 7.8 percent of
consumers who began debt settlement programs in 2006 had completed them by the end of
2008. 53.3 percent of consumers had dropped out of the programs. The Colorado information
came from licensed debt settlement providers, not outlaws or bad apples. See Comments of
the Colorado Attorney General on the FTCs proposed debt relief amendments to the Telemarketing Sales Rule, http://www.ftc.gov/os/comments/tsrdebtrelief/54367000189.pdf. In a
lawsuit brought against debt settler National Asset Services (NAS), the Florida Attorney General alleged that over a six-year period, only 13.5 percent of Florida residents had completed
NAS debt settlement program. In a similar case brought against NAS, the New York Attorney
General alleged that out of 1,981 New Yorkers enrolled in the NAS program, only about 3 percent completed it.
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II. North Carolina Law Prohibits Debt Settlement Services If Advance Fees
Are Charged
Debt relief services are not a new phenomenon, nor are the consumer abuses associated with such services. Over 40 years ago, at least 13 states, including North
Carolina, enacted debt adjusting or debt pooling statutes not just to regulate, but
to prohibit, the then-prevailing model of debt settlement. In fact, North Carolina
and the other similar state statutes made debt adjusting a criminal offense. The
1963 preamble to the North Carolina statute, N.C. Gen. Stat. 14423, et seq., explained the reasons for banning debt adjusting services, reasons which are still very
pertinent today:
. . . these [debt adjusting] practices have grown to such proportions that for the
most part they have become a national menace by preying upon unfortunate
people and harassed debtors, and those engaged in such practices, except for a
few, have engaged in false advertising, have falsely held themselves out as competent and able to solve debt problems regardless of any and all circumstances,
have lured ignorant and unsuspecting people into executing contracts heavily
loaded in their favor and have charged large fees for alleged services which results in piling debt upon debt.4
In 1963, the U.S. Supreme Court upheld the constitutionality of a similar Kansas
debt adjusting statute in a case brought by the Kansas Attorney General against
a company known as Credit Advisors. The Court held that the prohibitory statute
did not violate due process rights and noted the States evidence that the business
of debt adjusting lends itself to grave abuses against distressed debtors. Ferguson
v. Skrupa, 372 U.S. 726.
The original definition of debt adjusting in the North Carolina and similar statutes covered debt settlement activities but applied only where the debt adjuster received funds from the consumer to distribute to the consumers creditors. To get
around the statutes, debt settlers in recent years arranged for third party bank accounts to receive the consumers funds. By this method, the debt settlement company did not hold consumers money but could still direct the disbursement of funds
to pay its fees and to pay creditors if and when settlements were reached.
In 2005, the North Carolina General Assembly, recognizing the abuses perpetrated by the new breed of debt settlers, amended the debt adjusting statute to
simply prohibit advance fees for any debt settlement or foreclosure assistance services, whether or not the debt settler directly managed and disbursed consumer
funds. The amendments have created a bright line test for compliance and have
been effective enforcement tools. The 2005 amendments do not prevent debt settlement companies from operating in North Carolina as long as no fees are charged
prior to completion of settlements. The Attorney Generals Office is aware of at least
two national debt settlement companies currently doing business in North Carolina
without charging advance fees.
Licensed North Carolina attorneys are generally exempt from the debt adjusting
statute but unfortunately, some attorneys have run their law firms as debt settlement businesses with some of the worst deceptive practices in the industry. Two of
the North Carolina Attorney Generals litigated enforcement cases have been
against out-of-state law firms who defrauded consumers by diverting funds out of
client settlement accounts. One continuing area of concern is the practice by some
debt settlement companies to use attorneys as fronts to offer their services in states
that have restrictive debt settlement laws. A debt settlement company will arrange
for an out-of-state law firm to contract with a North Carolina resident. The law firm
then assigns all of the accounting and debt negotiation work back to the debt settlement firm. To claim an exemption from the debt adjusting law, the law firm may
associate a local North Carolina attorney to represent the client in name only.
III. Consumers Need Effective Debt Management Assistance
There is clearly a need for legitimate, effective debt relief for consumers who cannot pay off their credit card accounts and do not want to file for bankruptcy. However, the current model of debt settlement is not the answer. Most debt-strapped
consumers can benefit from financial counseling, budgeting, and debt management
services offered by nonprofit consumer credit counseling agencies. These agencies
offer debt management plans that allow for the orderly reduction of debt under a
payment plan agreed to by both the consumer and the creditor. Fees are nominal
and monthly payments are paid promptly to creditors, not held back for 12 months
4 1963
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N.C. Session Laws, Chap. 394.
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or more as with debt settlement. While in the plan, the consumer gets protection
from collection contacts.
One of the problems with current debt management programs is that they do not
offer significant principal reduction. The logical next step, which would benefit both
consumers and the banking industry, would be a combination of a multi-year payment plan followed by forgiveness of principal after successful completion of the payment plan. Principal reduction is now being incorporated into mortgage loan modification programs. Unfortunately, accounting rules relating to debt charge-offs have
prevented principal reduction programs from being implemented. A coalition of
bankers, consumer groups and credit counseling services have approached the Office
of the Comptroller of Currency (OCC) to authorize these programs but the OCC has
not been receptive to date.
IV. Conclusion
The debt settlement industry has been characterized by deceptive solicitations,
overpromising of results, underperformance of services, and excessive fees. Too
often, debt settlement companies have profited off of economically distressed consumers while delivering little relief in return. My colleagues in other attorneys general offices and I appreciate the attention the Committee is giving this important
consumer protection problem.
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Exhibit 1Sample Debt Settlement Solicitations
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Exhibit 2Sample Debt Settlement Fee Schedule
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The CHAIRMAN. Am I not correct in saying there are some 86 to

96 of the States attorneys general that are active in this?
Mr. LEHMAN. Just from my experience, yes, mostthe large majority of attorneys general are. And, as I said, 41 attorneys general
signed very detailed comments in support of the FTC rule. And in
those comments, which I would commend to the Committee, there
are many examples of the kind that weve heard from today, and
also examples of enforcement actions taken by attorneys general.
But, thats41 out of 50, thats 82 percent, yes.
The CHAIRMAN. Yes, thats what I meant to say.
62
Thank you very, very much.
Mr. John Ansbach, who is Legislative Director of the United
States Organization for Bankruptcy Alternatives, USOBA, and
General Counsel and Chief Compliance Officer for EFA Processing,
from Houston, Texas.
STATEMENT OF JOHN ANSBACH,
LEGISLATIVE DIRECTOR, UNITED STATES
ORGANIZATIONS OF BANKRUPTCY ALTERNATIVES
Mr. ANSBACH. Thank you, Mr. Chairman.

Quick correction. Im not the Chief Compliance Officer, I am the
Chief Operating Officer of that company. Im happy to correct that
in the record.
Mr. Chairman, distinguished members, thank you so much for
the opportunity to contribute to this very important meeting and
this very important discussion.
My name is John Ansbach. I am the Legislative Director for
USOBA. We are a trade group based in Houston, Texas. We represent approximately 200 companies that operate in the debt settlement industry. In addition to supporting those companies with
best practices, we also serve as a resource to consumers who are
looking for information about the debt relief process, generally, and
how to select an honest and ethical provider in this industry.
I am also employed, as you pointed out, Mr. Chairman, by a company that actually performs debt settlement work. In my role, I directly oversee approximately 100 employees, Texans, who talk to
consumers every day and who work to help these folks to find a
way out of debt without ending up in personal bankruptcy.
There has been a lot of discussion today about personal experiences. The Chairmansir, youve had some stories, and obviously,
weve heard Mrs. Haas story. If I may, Id like to begin my remarks with a consumer story, as well.
A wonderful woman, by the name of Ms. Faith Zabriske, suffered
an injury a few years ago. After utilizing her credit cards to pay
her medical and her living expenses, she fell behind on those payments. At that point, she did exactly what the Better Business Bureau and others tell her and so many to do, which is to simply call
your bank; theyll work with you. What she found instead, and
what she was told candidlythe woman from the bank said, Im
not supposed to tell you this, but until you fall behind on your payments for 6 months, we cant help you, essentially telling her to
stop paying her debts or there would be nothing that the bank
could do for her.
She tried credit counseling. They were similarly unhelpful. And
she found her way to a debt settlement company in Dallas, Texas.
After working her debt settlement program and saving the money
and working with the counselor, I am very pleased to report that
Ms. Zabriske is today debt-free. She is on her very last payments
with her last creditor, and is well on her way to financial stability.
Mr. Chairman, Ms. Zabriske, as well as another gentleman
named Mr. Gary Ross, another consumer that had a very successful debt settlement experience, are both here today. They are, in
factthats Mr. Ross and Ms. Zabriske, who have held up their
handstheyve come today from Texas and Illinois. I understand
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it is not possible for them to tell their story to the Committee, or
here in testimony, but I want the Chairman to know, and the
members, that if there is any interest in visiting with folks who
have, in fact, had a good experience, if there is something instructive in that, then they would be, both, very happy to appear and
talk about what their experience was.
The CHAIRMAN. You must have come up with them at the last
moment, because we asked youthe Committee asked you if you
wanted to have anybody testify, and you declined to have anybody
testify except yourself.
Mr. ANSBACH. I understand, Mr. Chairman. I dont think thats
actually accurate. I do understand that the Committee staff visited
with staff from both USOBA and our sister trade group. I understand that Mr. Ross, in particularhis name and contact information were provided. Of course, we only found out about this hearing
7 days ago. But, in any event, I assume that their ability to talk
and, certainly, to share perhaps what makes a good debt settlement versus a bad experience, such as Mrs. Haas hadperhaps
there is some instruction in that. And again, theyre here, if anybody would like to visit with them.
It is certainly the case, Mr. Chairman, thatand I want to be
very clear about thisdespite the fact that Ms. Zabriske or Mr.
Ross had a good experienceand, certainly, we are aware of hundreds and thousands of others who have had a good experience in
debt settlement, both
The CHAIRMAN. Would you say that again? Youre aware of hundreds of thousands of people that have had
Mr. ANSBACH. Hundreds and thousands. Yes, sir.
The CHAIRMAN. What is hundreds and thousands?
Mr. ANSBACH. Well, in particular, the Federal Trade Commission, when it held its hearinga public forum and open public comment, there were 200 comments that were submitted by consumers
directly who had, unlike me, been through a debt settlement program. And they ran 40-to-1 in support of, and in favor of, at least
preserving the options of debt settlement. In addition to those, my
company alone, and many of those that are represented here today,
also have literally piles and piles of written testimonials that we
would be very happy to share.
We dont think, by any means, that that means there is no problem in the industry. In fact, I would very much agree with whats
been said by Mr. Lehman and Mr. Kutz, and having heard Mrs.
Haas experience, its very clear to us that we have significant challenges in our industry. And, candidly, its the reason that folks, like
myself, my counterpart at TASC, and a number of us, spend so
much of our time going to different states, working on debt settlement-specific legislation.
Along these lines, I wanted to share a couple of examples of what
we think is a very important and needed regulatory approach. I
know Senator Boxer is not with us today, but in California specifically, we have been working now for 3 years on Assembly Bill 350,
which not only has fee regulation in it, which I think we all agree
is critical, but it is a comprehensive piece of legislation that has insurance and surety and licensing and bonding requirements, as
well as some of the things that the Federal Trade Commission have
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proposed, which we fully support. AB 350 has passed the House.
It is pending in the Senate. We are hopeful, although, obviously,
they have budget difficulties in the State, and Im not sure where
that will go, but were hopeful it will move.
I think an even better model is the Tennessee model. Tennessee
passed a piece of legislation that is very specific on fees. And I
want to be very clear on
The CHAIRMAN. Mr. Ansbach, this is fascinating testimony, and
youre speaking to your own advantage by not speaking to the nature of the hearing. Youre talking about what states are doing to
try and get rid of the kinds of problems that your association
causes. Youre leading us to believe that what you do is absolutely
wonderful and that all of these other experiences are just anomalies.
It is our impression that it is quite exactly the opposite of that
and that youre fundamentally making happy talk in front of a very
serious problem. And I dont appreciate that.
Now, if you have testimony which reflects upon, not what States
are doing, but how you see this problem, which is being represented here and which will be further represented by the person
next to youthe lady next to youthats what I want to hear.
Thats what youre here for. Youre not here to talk about what various States are doing.
Mr. ANSBACH. Mr. Chairman, I do apologize if in any way Ive
insulted this body. Because we were discussing fee regulation, I
thought it would be instructive to know what has been worked on
for the last 5 years. It was only in that respect that I wanted to
offer what Tennessee has done.
The CHAIRMAN. OK, well, youve done that now, so lets get back
to the subject.
Mr. ANSBACH. What I want to be very clear about, Mr. Chairman, isand I, again, apologizethis is not a rosy picture. I have
160 people that I employ, that do this work every single day. We
work very hard to help folks. Now, that does not mean that we are
100-percent successful and that, in any way, Mrs. Haas or any of
the other stories have been anomalies. I dont think thats true at
all. I think there are some significant issues in the industry, and
we need to address them.
With that said, the Federal Trade Commission has proposed a
number of things in the Notice of Proposed Rulemaking. Eighty
percent of it is incredibly important. We need more disclosure requirements. We need more prohibited misrepresentation rules. We
need fair advertising rules. The one portion of the rule that we are
unable to support, as Mr. Lehman has pointed out, is the advancefee ban.
The CHAIRMAN. Yes, which isof course, is the only thing that
makes you money.
Mr. ANSBACH. Respectfully, I would
The CHAIRMAN. I apologize, Senator McCaskill; I seem to be asking questions, and I shouldnt be doing that. But, I cant quite help
myself.
Senator MCCASKILL. Youll get a chance, Mr. Chairman.
The CHAIRMAN. Oh, I know that. Im just taking any chance I can
get.
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[Laughter.]
Senator MCCASKILL. I just thought maybe you, you know, hadnt
been around here long enough, and I could
The CHAIRMAN. Yes, right. Right.
[Laughter.]
The CHAIRMAN. Please proceed.
Mr. ANSBACH. Yes, sir.
The CHAIRMAN. But, you dont disagree with my statement, that
the one thing that you dont agree with is the one thing which puts
money in your pocket.
Mr. ANSBACH. I do, respectfully, disagree. Yes, sir.
The CHAIRMAN. And how would you disagree withno, Ill ask
that question later. Proceed with your testimony.
Mr. ANSBACH. Yes, sir.
The advance-fee ban thats proposed essentially says that a small
business owner that does this work must operate without revenue
for up to a year. That is the absoluteI mean, thats what it does.
And because itthe reason its a year is because consumers must
have time to create a savings. In that year, up to that time period,
folks that I employ, and others, must be able to stay on the phones,
to talk with them, to empower them with information about this
process. The reality is, I cannot afford to pay my employees for a
year without any revenue at all. That is the reason that we characterize this as the death of the industry. That is the reason, I suspect, that 85 percent of our members have indicated, in response
to surveys, that they will go out of business if an advance-fee ban,
in particular, is passed.
Allto be very clear, all of the rest of the rule is incredibly necessary and needed. There are, absolutely, issues in this industry
that must be addressed, but an advance-fee ban, actually, as Mr.
Lehman has already pointed out, has a very obvious consequence.
Most, if not all, of our members dont do business in North Carolina anymore, because they cant afford to. I dont see that as a successful outcome, because what has then happened, consumers no
longer have any other option. They have bankruptcy, they have
credit counseling, and nothing in the middle.
I do not believe, with all due respect, that that is the consumerprotective outcome that we are trying to get to with this regulation.
Mr. Chairman, Iyouve been very gracious with your time. If I
may just share a few very last things. And I will promise to answer
any questions that you may have.
Under the very fee structure that is being proposed to be outlawed, our members, as well as our sister trade groups members,
have resolved almost $3 billion in unsecured debt for consumers.
Clearly, there are positive results that are happening in this industry. We would simply ask that we be given the opportunity to stay
at the table. And again, were incredibly grateful that we were invited today. We simply want to continue to participate in this process. We want to help find appropriate and strong consumer protection regulation, whether it is here in Washington, D.C., or in the
states.
And in that regard, Im happy to answer any questions that you
might have.
[The prepared statement of Mr. Ansbach follows:]
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PREPARED STATEMENT OF JOHN ANSBACH, LEGISLATIVE DIRECTOR,
UNITED STATES ORGANIZATIONS OF BANKRUPTCY ALTERNATIVES
Chairman Rockefeller, Ranking Member Hutchison, distinguished members of the
Committee, thank you so much for the opportunity to be here today and to contribute to what I hope is a helpful and informative hearing for you on the topic of
debt settlement.
My name is John Ansbach, and I volunteer in service as the Legislative Director
of the Unites States Organizations for Bankruptcy Alternatives or USOBA.
USOBA is a trade association in Houston Texas whose members are 200 companies that offer debt relief services to financially strapped consumers who are trying
to avoid bankruptcy. In addition to supporting these member companies, USOBA
also serves as a resource to consumers who are trying to find out information about
the debt resolution process and what to look for in an honest, ethical provider. It
is in my capacity as the Legislative Director of USOBA that I appear before you
today.
I want you to know, as well, so that I can shed light on other areas of interest
to the Committee, that I am also the Chief Operating Officer and Genera Counsel
of what we in the industry refer to as a back-end company. As such, our company
works for other companies servicing their clients. In this role, I directly oversee
more than 100 Texas employees in the City of Frisco just north of Dallas who talk
to debt settlement consumers every day, supporting them, negotiating for them, giving them information about the unsecured debt process and otherwise helping them
to meet their savings goals and succeed in their programs.
The title of todays hearing is The Debt Settlement IndustryThe Consumers
Experience. In this regard, I want to offer as much information as I can to help
this committee better understand debt settlement and what it can and has done to
help consumers.
In this regard, please let me begin today with a real life example of debt settlement. It is the story of Faith Zabriske, a wonderful woman in my home state of
Texas who has lived the nightmare of being overwhelmed by debt, and who utilized
the services of a debt settlement company to not only survive that nightmare, but
to emerge from it stronger and financially stable.
Ms. Zabriske suffered an injury a few years ago and like many Americans was
forced to turn to her credit cards to pay medical bills and other living expenses to
survive.
Although she recovered from her injuries, she was soon overwhelmed by the debt
created by her ordeal. At that point she did exactly what the Better Business Bureau and consumer advocates tell consumers to do who are in such situations: she
called her credit card company to find out if they would work with her on repayment of the debt. At the time, Ms. Zabriske had a credit score in the high 700s and
had always paid her debts timely.
Unfortunately, what Ms. Zabriske found from her creditor was not help, but rather a refusal to work with her. She was told that until she was 6 months delinquent,
the bank wouldnt work with her. She tried credit counseling, as well, but they were
similarly unhelpful.
It wasnt until she enrolled in a debt settlement program that she found true support. After working her program, saving money as needed, her provider was able
to help Ms. Zabriske settle all of her debts and today she is debt free, on the path
to financial stability.
Ms. Zabriske is here today, having traveled all the way from Texas to tell her
story. USOBA offered to have her appear today to tell this story herself, but she
was not extended an invitation.
Mr. Gary Ross from Illinois, another consumer who had a successful experience
with debt settlement is also here and prepared to tell his story. HE was also offered,
but like Ms. Zabriske was not extended an opportunity to tell his story.
If any member of this committee or anyone else would like to visit with either
of these good folks to hear their story and their experience, they welcome the opportunity to visit after this hearing.
Ladies and gentlemen of this committee, Ms. Zabriske and Mr. Ross represent
just two of hundreds of stories of consumers who have had successful outcomes in
debt settlement programs. In fact, in the Federal Trade Commissions own public
comment period, of the 200 consumer testimonials the Commission received, we understand those testimonials ran 40:1 in favor and in support of preserving debt settlement as an important option for consumers in need.
And in fact, that is truly what we are here to talk about: preserving options. The
truth is that USOBA, as well as our sister trade group the Association of Settlement
Companies (TASC), supports strong consumer protection regulation in the debt
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settlement industry, including the overwhelming majority of what has been proposed by the FTC in its August Notice of Public Rulemaking. Stronger consumer
disclosure requirements are needed and should be adopted. Rules proscribing certain misrepresentations in advertising are needed and should be adopted. In fact,
USOBA and TASC have been arguing and working in support of these actions as
well as others for more than 5 years now in roughly 20 states, including but not
limited to licensing and registration requirements; bonding and insurance requirements; strong advertising rules; reasonable fee regulation including limits on
amount and timing of fee collection; contract requirements that set out specific language that must be included for the benefit of consumers; requiring education for
consumers; even requiring multiple language efforts where debtors in need dont
speak English as a first language to ensure an understanding of the program. These
efforts are ongoing even as we sit here today in California, Texas, Florida, Pennsylvania, New York, Illinois, Connecticut and Maryland. Nevada, Tennessee, Minnesota, Oregon, Utah, Montana, Delaware, Rhode Island and Colorado have already
adopted debt settlement statutes with input from both consumer groups and industry trade organizations.
In short, the industry has supported and continues to work for strong consumer
protection regulation of this industry; regulation that manages to enact such protection while preserving the ability of honest, ethical companies to provide consumers
with the services and options they need.
What we cannot support, however, and what we understand the FTC is attempting to implement via the Telemarketing Sales Rule, is fee regulation that would kill
the industry. The FTCs proposed advance fee ban would put 85 percent of our
membersmost of whom are small business ownersout of business. They would
accomplish this by essentially starving these businesses of revenue, disallowing the
collection of any fees for services rendered unless and until there was a settlement
of a debt, a process that often takes up to a year or more. In short, the FTC proposes to require American businesses owners to work for free for up to a yearpaying their own employees to talk to and help consumers; paying their rent; addressing expenses related to information technology and required infrastructuresall the
while being unable to collect fees from the very consumers they are trying to help.
The truly troubling part of this effort is that there exists another more reasonable
alternative, which the states themselves have adopted and which would be preempted by this effort. More specifically, the states of Colorado, Utah, Montana, Nevada, Delaware and Tennessee have adopted a capped and limited pay as you go
fee structure that both limits the amount of money a consumer may be charged and
when the fees may be collected.
Tennessee in particular has a very workable system that balances good consumer
protection and the rights of honest ethical providers to be compensated for their
services. Under the Tennessee law, a provider may charge in one of two ways: a
savings model that allows for fee recovery based on what the provider saves the consumer; and, a pay as you go fee system, under which no more than 17 percent
of a consumers enrolled debt may be charged. Further, fees cannot be collected any
sooner than in equal payments spread out over half the life of a consumers program. In a typical case where $10,000 in debt is enrolled then, a consumer may not
be charged more than $1,700. This fee must then be collected over half the life of
a program. Where programs typically last thirty-six months, half the life would be
eighteen months, thus fees of $1,700 over eighteen months or $94 per month. The
result is a good, middle of the road approach than ensures a consumer does not face
high up front fees, while preserving a modicum of revenue for his or her provider,
allowing the business to pay its employees and rent.
Distinguished members, the allegations that are often made by the consumer
groups in particular, and which you may hear today, resonate around one critical
point: that debt settlement services are rarely if ever provided to consumers as
promised. Well ladies and gentlemen, please allow me to report the following facts
that we believe refute such assertions:
USOBA members alone have settled more than $1.4 billion in unsecured debt
over the last few years.
This debt was settled for consumers who experienced an average reduction of
53 percent; that is, they settled their debt for 47 cents on the dollar.
Our members alone are right now servicing more than 277,000 consumers, consumers who will be stranded and left to bankruptcy if the FTCs rule is passed
as drafted and these providers go out of business.
When you add TASCs members into this mix, you find that roughly $3 billion
of unsecured debt has been settled for America consumers.
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If I may, let me also add for you the very most recent numbers from my company,
just one USOBA member company that services other providers working for consumers:
Last month alone, in March 2010, we:
Settled 1,491 individual accounts with a value at enrollment of $9.14 million.
Those accounts were settled for $3.9 million, or $0.36 on the dollar, a savings
of 64 percent to the consumers.
Over the last 3 months (JanMarch), we:
Settled 3800 accounts (3,793) with a total value at enrollment of $22.9 million.
Those accounts were settled at an average of $0.36 on the dollar, again saving
those consumers 64 percent on their outstanding debts.
To date, my company has settled more than 39,000 accounts with a value of
$214.5 million at approximately $0.40 on the dollara 60 percent savings to American consumers. We are currently working on settling $1.17 billion in debt for our
consumers, again most if not all of whom will be stranded and abandoned to bankruptcy if we are forced out of business by the FTCs proposed fee ban.
On this last note, I do want you to know the impact of the FTCs proposed fee
regulation on employees. In my home state of Texas, alone, we estimate more than
1,100 Texans will lose their jobs if this rule is adopted. These are hard working
folks employed by USOBA member companies, only. If we add the TASC companies,
we estimate this number is closer to 2,5003,000 jobs lost just in Texas. While we
do not have numbers in every state, we do know that hundreds if not thousands
of more jobs will be lost from this rule, specifically in California and Florida, where
debt settlement is a much needed service due to economic conditions and the still
lingering effects of the housing bubble. In short, it is likely if not certain that as
many as 10,000 Americans will lose their jobs if the FTC rejects the approach adopted by the states and proceeds instead with the radical fee ban they propose.
Senators, we know youlike USOBA and TASCwant to protect consumers. And
we know youlike USOBA and TASCwant to ensure that honest, ethical debt settlement companies can continue to help those consumers, keeping employed the
thousands of hard working folks who dedicate their days to helping people get out
of debt responsibly and ethically. In that, please allow us to work with you and the
Commission on a reasonable approach that includes reasonable fee regulation, as
well as the many other consumer protections we and so many others support.
On behalf of the 160 people in my company in Frisco, Texas, the thousands of
others employed by our members companies, the more than a quarter million consumers they serve right now across the country, as well as the folks employed by
TASC and the consumers they serve, I thank you so much for the opportunity to
contribute to this discussion and I look forward to trying to answer any questions
you may have.
The CHAIRMAN. Thank you.

And finally, the Honorable Julie Brill, Commissioner of the Federal Trade Commission.
STATEMENT OF HON. JULIE BRILL, COMMISSIONER,
FEDERAL TRADE COMMISSION
Ms. BRILL. Thank you very much.

The CHAIRMAN. Were trying to save your life, incidentally.
Ms. BRILL. Oh, really?
The CHAIRMAN. Of the FTC. There are those who are
Ms. BRILL. Oh, yes.
The CHAIRMAN.who are malevolently proceeding to try and remove your powers. That will not happen.
Ms. BRILL. And we certainly appreciate all your efforts in that
regard, Mr. Chairman. Thank you very much.
Chairman Rockefeller, members of the Committee, I am Julie
Brill, a Commissioner of the Federal Trade Commission.
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Thank you for inviting me to testify about a critical issue for consumers during these difficult economic times: problematic practices
in the debt relief industry.
Im honored to be here today in my brand new role as an FTC
Commissioner. As you know, Ive spent almost my entire career
working to protect consumers from unscrupulous business practices. Id like to thank the Committee for giving me the opportunity
to bring my consumer protection skills and experience to the FTC.
American consumers are overwhelmed with mortgage and credit
card debt. At least 13 million Americans owe $10,000 or more in
credit card debt. Of those households that are carrying credit card
debt, the average amount of the debt load is approximately
$16,000. And over 14 million American households are 30 or more
days delinquent in their credit card bills. Many of these consumers
have lost their jobs or have seen their working hours cut back,
making their debt load all the more worrisome.
Such financially distressed consumers are vulnerable to schemes
that promise miraculous solutions to their debt problems. As I stated in my confirmation hearing, these consumers have a target on
their back.
Youve heard compelling testimony this afternoon from the GAO
regarding the deceptive and unfair marketing of debt settlement
services. While there are some consumers, like Ms. Zabriske and
Mr. Ross, who have benefited from the services offered by debt settlement companies, the GAOs disturbing findings are consistent
with what the FTC has encountered in many of our own investigations. Debt settlement firms frequently convince consumers to pay
large fees by falsely promising to obtain deep reductions in the consumers debt.
Youve probably heard the advertisements on the radio or latenight TV: In debt? Cant pay your bills? Debt collectors calling you
at all hours? Call us now. We will negotiate with your creditors so
that you can become debt-free. Through advertisements like these
and follow-up aggressive telemarketing pitches, debt settlement
companies often make dramatic savings promises that they cannot
keep.
They also sometimes make misleading statements about the fees
that the consumers must pay for their services. Consumers may
end up shelling out large sums of money up front, hundreds or
even thousands of dollars, with nothing in return but empty promises.
Now, keep in mind, the financially strapped consumers who respond to these sales pitches are having trouble paying creditors before piling on the fees of a debt settlement company. Many consumers, like Mr. Spaulding in West Virginia and Mr. and Mrs.
Haas, who are here today, simply cant keep up with paying the
new fees and covering their existing debt, and are forced to drop
out of these programs, often forfeiting all the money theyve paid
in fees, leaving them worse off than when they started.
The Commission has been actively pursuing those debt relief
service providers and other fraudsters who prey on Americans
hardest hit by the financial crisis. In an effort to improve law enforcement and set clear standards for the debt relief industry, the
Commission published a proposed rule last August. The proposal
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would amend the telemarketing sales rule to cover debt relief providers that promote and sell their services over the telephone.
It would be premature to speculate about whether the Commission will issue a final rule, and, if so, what the rule might contain.
But, I can assure you that the proceeding has been thorough,
thoughtful, transparent, and fair. The Commission received written
comments from over 300 individuals, corporations, and organizations. The Commission also hosted a public forum to discuss the
proposed amendments, with stakeholders representing a wide variety of viewpoints. And the Commission staff has had extensive discussions with industry representatives, consumer advocates, and
other interested parties.
Thank you, again, for the opportunity to describe how the FTC
is protecting financially strapped consumers from those debt relief
services that engage in deceptive and abusive practices.
Id be happy to answer any questions.
[The prepared statement of Ms. Brill follows:]
PREPARED STATEMENT OF HON. JULIE BRILL, COMMISSIONER,
FEDERAL TRADE COMMISSION
I. Introduction
Chairman Rockefeller, Ranking Member Hutchison, and members of the Committee, I am Julie Brill, a Commissioner of the Federal Trade Commission (FTC
or Commission).1 I appreciate the opportunity to appear before you today, and the
Commission thanks this Committee for its interest in the work of the FTC to protect
consumers from deception and abuse in the sale of debt relief services.
The Commission has long been active in protecting consumers of financial products and services offered by entities within the agencys jurisdiction. With Americans continuing to feel the effects of the recent economic downturn, the Commission
has stepped up its efforts to stop fraudulent financial schemes that exploit consumers who are particularly vulnerable as a result of financial distress. Stopping
deceptive debt relief practices is one of our highest consumer protection priorities.
Providers of debt relief services purport to help people who cannot pay their debts
by negotiating on their behalf with creditors. Debt settlement companies, for example, market their ability to dramatically reduce consumers debts, often by making
claims to reduce debt by specific and substantial amounts, such as save 40 to 60
percent off your credit card debt. To be sure, some debt relief services do help consumers reduce their debt loads. In too many instances, however, consumers pay
hundreds or thousands of dollars for these services but get nothing in return.
The FTC utilizes its four principal tools to protect consumers of debt relief services: law enforcement, rulemaking, consumer education efforts, and research and
policy development. To halt deceptive and abusive practices and return money to
victimized consumers, the Commission has brought 20 lawsuits in the last 7 years
against sham nonprofit credit counseling firms, debt settlement services, and debt
negotiators, including 6 in the past year alone.2 These cases have helped over
475,000 consumers who have been harmed by deceptive and abusive practices.3 The
Commission continues to actively investigate debt relief companies and will continue
aggressive enforcement in this arena. As the Commissions law enforcement experience has shown, victims of these schemes often end up more in debt than when they
1 The views expressed in this statement represent the views of the Commission. My oral presentation and responses to any questions you may have are my own, however, and do not necessarily reflect the views of the Commission or any other Commissioner.
2 A list of the Commissions law enforcement actions against debt relief companies is attached
as Appendix A.
3 In addition to consumers who lost money from fraudulent debt relief companies, hundreds
of thousands, if not millions, of consumers have been harassed by automated robocalls pitching
services in violation of the Do Not Call provisions of the Telemarketing Sales Rule. The Commission has charged companies engaging in these robocalls with violations of the rule. See, e.g., FTC
v. Economic Relief Techs., LLC, No. 09CV3347 (N.D. Ga., preliminary injunction issued Dec.
17, 2009); FTC v. 2145183 Ontario, Inc., No. 09CV7423 (N.D. Ill., preliminary injunction
issued Dec. 17, 2009); FTC v. JPM Accelerated Servs. Inc., No. 09CV2021 (M.D. Fla., preliminary injunction issued Dec. 31, 2009).
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began. Especially in these difficult economic times, when so many consumers are
struggling to keep their heads above water, this is unacceptable.
Below, this testimony provides an overview of the three common types of debt relief services, as well as the Commissions law enforcement efforts with respect to
each. The testimony then describes the Commissions proposal to amend its Telemarketing Sales Rule (TSR) 4 to strengthen the agencys ability to stop deception
and abuse in the provision of debt relief services. Finally, the testimony addresses
the FTCs ongoing efforts to educate consumers about debt relief options and how
to avoid scams.5
II. The Commissions Authority
The Commission enforces Section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices in or affecting commerce,6 as well as the Telemarketing and
Consumer Fraud and Abuse Prevention Act (Telemarketing Act),7 and the associated TSR that prohibit certain deceptive and abusive telemarketing practices.8 The
Commission has used this authority to challenge debt relief providers within its jurisdiction 9 who have engaged in deceptive or abusive practices. In addition, the
Commission works to protect consumers from a wide range of other unfair, deceptive, and abusive practices in the marketplace, such as credit-related and government grant scams, mortgage loan modification scams, deceptive marketing of health
care products, deceptive negative option marketing, and business opportunity and
work-at-home schemes.10 The FTC works closely with many state attorneys general
and state banking departments to leverage resources in consumer protection.
III. Overview of Debt Relief Services and FTC Law Enforcement Efforts
Debt relief services have proliferated over the past few years as greater numbers
of consumers are struggling with debts they cannot pay. A range of nonprofit and
for-profit entitiesincluding credit counselors, debt settlement companies, and debt
negotiation companiesoffer to help consumers facing debt problems. As detailed
below, consumers have complained of deceptive and abusive practices in all of these
services, resulting in the FTC and state enforcement and regulatory bodies bringing
numerous cases.11
4 16
C.F.R. 310.1 et seq.

5 With respect to its research and policy development in this area, in September 2008, the
Commission held a public workshop entitled Consumer Protection and the Debt Settlement Industry, which brought together stakeholders to discuss consumer protection concerns associated
with debt settlement services. Workshop participants also debated the merits of possible solutions to those concerns. An agenda and transcript of the Workshop are available at www.ftc.gov/
bcp/workshops/debtsettlement/index.shtm. Public comments associated with the Workshop are
available at www.ftc.gov/os/comments/debtsettlementworkshop/index.shtm.
6 15 U.S.C. 45.
7 15 U.S.C. 61016108. Pursuant to the Telemarketing Acts directive, the Commission promulgated the original TSR in 1995 and subsequently amended it in 2003 and in 2008.
8 The Commission also has law enforcement authority and, in some cases, regulatory powers
under a number of other consumer protection statutes specifically related to financial services,
including the Truth in Lending Act, 15 U.S.C. 16011666j; the Consumer Leasing Act, 15
U.S.C. 16671667f; the Fair Debt Collection Practices Act, 15 U.S.C. 16921692o; the Fair
Credit Reporting Act, 15 U.S.C. 16811681x; the Equal Credit Opportunity Act, 15 U.S.C.
16911691f; the Credit Repair Organizations Act, 15 U.S.C. 16791679j; the Electronic
Funds Transfer Act, 15 U.S.C. 16931693r; the privacy provisions of the Gramm-Leach-Bliley
Act, 15 U.S.C. 68016809; and the Omnibus Appropriations Act of 2009, Pub. L. No. 111
8, 626, 123 Stat. 524 (Mar. 11, 2009).
9 The FTC Act exempts banks and other depository institutions and bona fide nonprofits,
among others, from the Commissions jurisdiction. 15 U.S.C. 44 and 45(a)(2). These exemptions apply to the Telemarketing Act and the TSR as well.
10 Since the beginning of 2009, the FTC has brought 40 cases against defendants engaged in
deceptive practices targeting financially-distressed consumers.
11 The Commission has addressed similar problems with respect to companies offering to resolve consumers mortgage debts. The Commission has engaged in an aggressive, coordinated
enforcement initiative to shut down companies falsely claiming the ability to obtain mortgage
loan modifications or other relief for consumers facing foreclosure. In the past year, the FTC
has brought 17 cases (against more than 90 defendants) targeting foreclosure rescue and mortgage modification frauds, with other matters under active investigation. In addition, state enforcement agencies have brought more than 200 cases against such firms. Further, as directed
by Congress under the Omnibus Appropriations Act of 2009, Pub. L. No. 1118, the Commission
has initiated a rulemaking proceeding addressing the for-profit companies in this industry.
Under the proposed rule, companies could not receive payment until they have obtained for the
consumer a documented offer from a mortgage lender or servicer that comports with any promises previously made. Mortgage Assistance Relief Services, 75 Fed. Reg. 10707 (Mar. 9, 2010).
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A. Credit Counseling Agencies
Credit counseling agencies (CCAs) historically were nonprofit organizations that
worked as liaisons between consumers and creditors to negotiate debt management
plans (DMPs). DMPs are monthly payment plans for the repayment of credit card
and other unsecured debt that enable consumers to repay the full amount owed to
their creditors but under renegotiated terms that make repayment less onerous.12
Credit counselors typically also provide educational counseling to assist consumers
in developing a manageable budget and avoiding debt problems in the future. Beginning in the late 1990s, however, some CCAs registered as nonprofit organizations
with the Internal Revenue Service, but in reality operated as for-profit companies
and engaged in aggressive and illegal marketing practices. Other CCAs incorporated
and openly operated as for-profit companies.
Since 2003, the Commission has filed six cases against for-profit credit counseling
providers for deceptive and abusive practices.13 In one of these cases, the FTC sued
AmeriDebt, Inc., at the time one of the largest CCAs in the United States.14 On the
eve of trial, the FTC obtained a $35 million settlement, and thus far has distributed
$12.7 million in redress to 287,000 consumers.15 In the various cases, the FTC
charged that the credit counseling agencies engaged in several common patterns of
deceptive conduct in violation of Section 5 of the FTC Act and the TSR, including:
misrepresentations about the benefits and likelihood of success consumers could
expect from the services, including the savings they would realize; 16
misrepresentations regarding CCA fees, including false claims that they did not
charge upfront fees; 17 and
deceptive statements regarding their purported nonprofit nature; 18
violations of the TSRs provisions that require certain disclosures and prohibit
misrepresentations, as well as the requirements of the TSRs Do Not Call provisions.19
Over the last several years, in response to abuses such as these, the IRS also has
challenged a number of purportedly nonprofit CCAsboth through enforcement of
existing statutes and new tax code provisionsresulting in the revocation, or proceedings to revoke, the nonprofit status of 41 CCAs.20 In addition, state authorities
have brought at least 21 cases against CCAs under their own statutes and rules.
12 To be eligible for a DMP, a consumer generally must have sufficient income to repay the
full amount of his or her debts, provided that the terms are adjusted to make such repayment
possible.
13 See Appendix A (items 10, 12, 13, 16, 18, and 20).
14 FTC v. AmeriDebt, Inc., No. PJM 033317 (D. MD., final order May 17, 2006).
15 See FTC Press Release, FTCs AmeriDebt Lawsuit Resolved: Almost $13 Million Returned
to 287,000 Consumers Harmed by Debt Management Scam (Sept. 10, 2008), www.ftc.gov/opa/
2008/09/ameridebt.shtm. A court-appointed receiver is continuing to track down the defendants
assets, and the FTC expects to make another distribution this year.
16 See United States v. Credit Found. of Am., No. CV 063654 ABC(VBKx) (C.D. Cal., final
order June 16, 2006); FTC v. Integrated Credit Solutions, Inc., No. 06806SCBTGW (M.D.
Fla., final order Oct. 16, 2006); FTC v. Debt Mgmt. Found. Servs., Inc., No. 041674T17MSS
(M.D. Fla., final order Mar. 30, 2005).
17 See FTC v. Express Consolidation, No. 06cv61851WJZ (S.D. Fla., final order May 5,
2008); FTC v. AmeriDebt, Inc., No. PJM 033317 (D. MD. 2006).
18 See FTC v. Integrated Credit Solutions, Inc., No. 06806SCBTGW (M.D. Fla. 2006); FTC
v. Express Consolidation, No. 06cv61851WJZ (S.D. Fla. 2008); United States v. Credit Found.
of Am., No. CV 063654 ABC(VBKx) (C.D. Cal. 2006); FTC v. Debt Mgmt. Found. Servs., Inc.,
No. 041674T17MSS (M.D. Fla. 2005); FTC v. AmeriDebt, Inc., No. PJM 033317 (D. MD.
2006). Although the defendants in these cases had obtained IRS designation as nonprofits under
Section 501(c)(3) of the Internal Revenue Code, they allegedly funneled revenues out of the
CCAs and into the hands of affiliated for-profit companies and/or the principals of the operation.
Thus, the FTC alleged that the defendants were operating for their own profit or that of their
members and fell outside the nonprofit exemption in the FTC Act. 15 U.S.C. 44.
19 See FTC v. Express Consolidation, No. 06cv61851WJZ (S.D. Fla. 2007); United States v.
Credit Found. of Am., No. CV 063654 ABC(VBKx) (C.D. Cal. 2006).
20 Eileen Ambrose, Credit firms status revoked; IRS says 41 debt counselors will lose tax-exempt standing, Baltimore Sun, May 16, 2006; see generally TSR Proposed Rule, 74 Fed. Reg.
41988, 41992 (Aug. 19, 2009). To enhance the IRSs ability to oversee CCAs, Congress amended
the IRS Code in 2006, adding Section 501(q) to provide specific eligibility criteria for CCAs seeking tax-exempt status as well as criteria for retaining that status. See Pension Protection Act
of 2006, P.L. 109280, 1220 (Aug. 2006) (codified at 26 U.S.C. 501(q)). Among other things,
Section 501(q) of the Code prohibits tax-exempt CCAs from refusing to provide credit counseling
services due to a consumers inability to pay or a consumers ineligibility or unwillingness to
agree to enroll in a DMP; charging more than reasonable fees for services; and, unless allowed
by state law, basing fees on a percentage of a clients debt, DMP payments, or savings from
enrolling in a DMP. In addition, as a result of changes in the Federal bankruptcy code, 158 non-
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B. Debt Settlement Services
For-profit debt settlement companies purport to obtain lump sum settlements for
consumers with their unsecured creditors for significantly less than the full outstanding balance of the debts. Unlike a traditional DMP, the goal of a debt settlement plan is to enable the consumer to repay only a portion of the total owed. Debt
settlement providers heavily market through Internet, television, radio, and print
advertising. The advertisements typically make claims about the companys supposed ability to reduce consumers debts to a fraction of the full amount owed, and
then encourage consumers to call a toll-free number for more information.21 During
the calls, telemarketers repeat and embellish many of these claims.
Most debt settlement companies charge consumers hundreds, or even thousands,
of dollars in upfront fees, in many cases with the entire amount of fees due within
the first few months of enrollment and before any debts are settled. An increasing
number of providers spread their fees over a longer periodfor example, 12 to 18
monthsbut consumers generally still pay a substantial portion of the fees before
any of their payments are used to pay down their debt. And most consumers drop
out of these programs before completion because they cannot afford, as many of the
plans require, to simultaneously: (1) pay the providers fees, (2) save money for the
settlements, and (3) continue making their monthly payments to creditors to avoid
late charges and additional interest. Consumers who drop out typically forfeit all
of the money they paid to the debt settlement company, regardless of whether they
received any settlements from their creditors.
Since 2004, the Commission has brought eight actions against debt settlement
providers, alleging that they failed to deliver the results promised to consumers and
deceived consumers about key aspects of their programs.22 The defendants misrepresentations included claims that:
the provider will, or is highly likely to, obtain large reductions in debt for enrollees, e.g., a 50 percent reduction or elimination of debt in 12 to 36 months; 23
the provider will stop harassing calls from debt collectors as well as collection
lawsuits; 24
the provider has special relationships with creditors and is expert in inducing
creditors to grant concessions; 25
the consumer will not have to pay substantial upfront fees,26 and
the consumer will be able to obtain a refund if the provider is unsuccessful.27
The Commission also has alleged that debt settlement companies represented that
consumers can, and should, stop paying their creditors, while not disclosing that
failing to make payments to creditors may actually increase the amount consumers
owe (because of accumulating fees and interest) and would adversely affect their
credit rating.28 In addition to the FTC cases, state attorneys general and regulators
profit CCAs, including the largest entities, have been subjected to rigorous screening by the Department of Justices Executive Office of the U.S. Trustee. Finally, nonprofit credit counseling
agencies must comply with state laws in 49 states, most of which specify particular fee limits.
21 See, e.g., FTC v. Debt-Set, Inc., No. 1:07cv00558RPM (D. Colo., final order Apr. 11,
2008); FTC v. Edge Solutions, Inc., No. CV074087 (E.D.N.Y., final order Aug. 29, 2008); FTC
v. Connelly, No. SA CV 06701 DOC (RNBx) (C.D. Cal., final order Oct. 2, 2008); FTC v. Jubilee
Fin. Servs., Inc., No. 026468 ABC (Ex) (C.D. Cal., final order Dec. 12, 2004).
22 See Appendix A (items 1, 7, 8, 11, 15, 16, 17, 19).
23 See, e.g., FTC v. Edge Solutions, Inc., No. CV074087 (E.D.N.Y. 2008); FTC v. Innovative
Sys. Tech., Inc., No. CV040728 GAF JTLx (C.D. Cal., final order July 13, 2005).
24 See, e.g., FTC v. Debt-Set, Inc., No. 1:07cv00558RPM (D. Colo. 2008); FTC v. Better
Budget Fin. Servs., Inc., No. 0412326 (WG4) (D. Mass., final order Mar. 28, 2005); FTC v. Jubilee Fin. Servs., Inc., No. 026468 ABC (Ex) (C.D. Cal. 2004).
25 See, e.g., FTC v. Debt-Set, Inc., No. 1:07cv00558RPM (D. Colo. 2008); FTC v. Better
Budget Fin. Servs., Inc., No. 0412326 (WG4) (D. Mass. 2005). Some providers are also misrepresenting that their service is part of a government program through the use of such terms
as government bailout or stimulus money. See, e.g., Steve Bucci, Settle Credit Card Debt For
Pennies?, Feb. 2, 2010, www.bankrate.com/finance/credit-cards/settle-credit-card-debt-for-pennies1.aspx; see also FTC, Press Release, FTC Cracks Down on Scammers Trying to Take Advantage of the Economic Downturn (July 1, 2009), available at www.ftc.gov/opa/2009/07/shortchange.shtm.
26 See, e.g., FTC v. Debt-Set, No. 1:07cv00558RPM (D. Colo. 2008).
27 See, e.g., FTC v. Innovative Sys. Tech., Inc., No. CV040728 GAF JTLx (C.D. Cal. 2005).
28 See, e.g., FTC v. Connelly, No. SA CV 06701 DOC (RNBx) (C.D. Cal. 2008); FTC v. Jubilee
Fin. Servs., Inc., No. 026468 ABC (Ex) (C.D. Cal. 2004).
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have filed over 117 law enforcement actions against debt settlement providers under
state statutes that, among other things, ban unfair or deceptive practices.29
C. Debt Negotiation
For-profit debt negotiation companies assert that they can obtain interest rate reductions or other concessions from creditors to lower consumers monthly payments.
Such companies often market debt negotiation services through so-called automated
robocalls. Like debt settlement companies, many debt negotiation providers charge
significant upfront fees and promise specific results, such as a particular interest
rate reduction or amount of savings.30 In some cases, the telemarketers of debt negotiation services refer to themselves as card services or a customer service department during calls with consumers in order to mislead them into believing that
the telemarketers are associated with the consumers credit card company.31
The FTC has brought six actions against defendants alleging deceptive debt negotiation practices.32 In each case, the Commission alleges that defendants: (1) misrepresented that they could reduce consumers interest payments by specific percentages or minimum amounts, (2) falsely purported to be affiliated, or have close
relationships, with consumers creditors,33 and (3) violated the TSRs Do Not Call
provisions, among other TSR violations.34
Our law enforcement colleagues at the state level also have focused attention on
bogus debt negotiation companies. The states have brought at least ten cases
against such firms, and the FTC will continue to work closely with our state partners on these and related issues.
IV. The Commissions Rulemaking Proceeding
In August 2009, the Commission published in the Federal Register proposed
amendments to the TSR to address abuses in the debt relief industry.35 Congress
authorized the FTC to conduct rulemaking proceedings under the Telemarketing Act
using the Administrative Procedure Acts notice-and-comment procedures,36 and
this proceeding has moved expeditiously and is nearing completion.
The TSR amendments proposed last August would, among other things:
extend the existing protections of the TSR to inbound debt relief calls, i.e., those
where consumers call a telemarketer in response to a general media or direct
mail advertisement; 37
mandate certain additional disclosures and prohibit misrepresentations in the
telemarketing of debt relief services; and
prohibit any debt relief service from requesting or receiving payment until it
produces the promised services and documents this fact to the consumer.
In response to this proposal, the Commission received written comments from 314
stakeholders, including representatives of the debt relief industry, creditors, law enforcement, consumer advocates, and individual consumers.38 In November 2009,
Commission staff hosted a public forum on the proposed TSR amendments, at which
participants representing all of the major stakeholders discussed the key consumer
protection issues and problems that are present in the debt relief industry and pos29 See, e.g., Minnesota v. American Debt Settlement Solutions, Inc., No. 70CV104478
(Minn., 4th Dist., filed Feb. 18, 2010); Illinois v. Clear Your Debt, LLC, No. 2010CH00167
(Ill. 7th Cir., filed Feb. 10, 2010); Colorado Attorney General Press Release, Eleven Companies
Settle with the State Under New Debt-Management and Credit Counseling Regulations (Mar. 12,
2009), available at www.ago.state.co.us/pressldetail.cfmpressID=957.html; Texas v. CSA-Credit
Solutions of Am., Inc., No. 09000417 (Dist. Travis Cty, filed Mar. 26, 2009); Florida v. Boyd,
No. 2008CA002909 (Cir. Ct. 4th Cir. Duval Cty, filed Mar. 5, 2008).
30 See FTC v. Economic Relief Techs., LLC, No. 09CV3347 (N.D. Ga. 2009); FTC v. 2145183
Ontario, Inc., No. 09CV7423 (N.D. Ill. 2009); FTC v. JPM Accelerated Servs. Inc., No. 09CV
2021 (M.D. Fla. 2009); FTC v. Group One Networks, Inc., No. 8:09cv352T26MAP (M.D.
Fla.2009); FTC v. Select Pers. Mgmt., No. 070529 (N.D. Ill., final order May 15, 2009); FTC
v. Debt Solutions, Inc., No. 060298 JLR (W.D. Wash., final order June 18, 2007).
31 See cases cited supra, note 30.
32 See Appendix A (items 2, 3, 4, 5, 6, and 14).
33 See FTC v. Economic Relief Techs., LLC, No. 09cv3347 (N.D. Ga. 2009); FTC v. 2145183
Ontario, Inc., No. 09cv7423 (N.D. Ill. 2009); FTC v. Group One Networks, Inc., No. 8:09cv
352T26MAP (M.D. Fla. 2009); FTC v. Select Pers. Mgmt., No. 070529 (N.D. Ill. 2009); FTC
v. Debt Solutions, Inc., No. 060298 JLR (W.D. Wash. 2007).
34 See FTC v. Economic Relief Techs., LLC, No. 09CV3347 (N.D. Ga. 2009); FTC v. 2145183
Ontario, Inc., No. 09CV7423 (N.D. Ill. 2009); FTC v. JPM Accelerated Services Inc., No. 09
CV2021 (M.D. Fla. 2009).
35 TSR Proposed Rule, 74 Fed. Reg. 41988 (Aug. 19, 2009).
36 15 U.S.C. 6102(b).
37 Outbound calls to solicit the purchase of debt relief services are already subject to the TSR.
38 These public comments are available at www.ftc.gov/os/comments/tsrdebtrelief/index.shtm.
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sible solutions for them.39 After the forum, Commission staff sent letters to industry
trade associations and individual debt relief providers that had submitted public
comments, soliciting follow-up information in connection with certain issues that
arose at the forum.40 Sixteen trade associations and companies responded and provided data. At this time, the Commission staff is reviewing the entire record in this
proceeding and drafting a final rule for the Commissions consideration.
V. Efforts to Educate Consumers
To complement its law enforcement and rulemaking, the Commission has made
significant efforts to educate consumers about debt relief services and alert them to
possible deceptive practices. Most recently, the agency released a brochure entitled
Settling Your Credit Card Debts, which offers struggling consumers tips on seeking assistance with their debts and spotting red flags for potential scams.41 This
brochure, along with additional educational materials on debt relief,42 is available
at a new FTC web page, www.ftc.gov/MoneyMatters.43
In addition, the Commission has conducted numerous education campaigns designed to help consumers manage their financial resources, avoid deceptive and unfair practices, and become aware of emerging scams. For example, the FTC has undertaken a major consumer education initiative related to mortgage loan modification and foreclosure rescue scams, including the release of a suite of mortgage-related resources for homeowners.44 Moreover, the agency has focused outreach efforts
on a number of other issues faced by people in economic distress, including stimulus
scams, rental scams, church opportunity scams, offers for bogus auto warranties,
and solicitations for phony charities that exploit the publics concern for the welfare
of our troops and public safety personnel in a time of crisis.
The Commission encourages wide circulation of all of its educational resources
and makes bulk orders available free of charge, including shipping. We provide FTC
materials to state attorneys general and other local law enforcement entities, consumer groups, and nonprofit organizations, who in turn distribute them directly to
consumers. In addition, media outletsonline, print, and broadcastroutinely cite
our materials and point to our guidance when covering debt-related news stories.
VI. Conclusion
The FTC appreciates the opportunity to describe to this Committee its work to
protect vulnerable consumers from deceptive and abusive conduct in the marketing
of debt relief services. Stopping the purveyors of empty promises who prey on consumers facing financial hardship is among the FTCs highest priorities, and we will
continue our aggressive law enforcement and educational programs in this area.
APPENDIX A
FTC Law Enforcement Actions Against Debt Relief Companies
1. FTC v. Credit Restoration Brokers, LLC, No. 2:10cv0030CEHSPC (M.D.
Fla., complaint issued Jan. 20, 2010) (debt settlement and credit repair)
2. FTC v. 2145183 Ontario, Inc., No. 09CV7423 (N.D. Ill., preliminary injunction issued Dec. 17, 2009) (debt negotiation)
3. FTC v. Econ. Relief Techs., LLC, No. 09CV3347 (N.D. Ga., preliminary injunction issued Dec. 14, 2009) (debt negotiation)
4. FTC v. JPM Accelerated Servs. Inc., No. 09CV2021, (M.D. Fla., preliminary
injunction issued Dec. 31, 2009) (debt negotiation)
39 A transcript of this forum is available at www.ftc.gov/bcp/rulemaking/tsr/tsr-debtrelief/
index.shtm.
40 The letters are posted at www.ftc.gov/os/comments/tsrdebtrelief/index.shtm.
41 The brochure is available at www.ftc.gov/bcp/edu/pubs/consumer/credit/cre02.shtm.
42 Fiscal Fitness: Choosing a Credit Counselor (2005), available at www.ftc.gov/bcp/edu/
pubs/consumer/credit/cre26.shtm; For People on Debt Management Plans: A Must-Do List
(2005), available at www.ftc.gov/bcp/edu/pubs/consumer/credit/cre38.shtm; Knee Deep in Debt
(2005), available at www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm. In the last year
and a half, the FTC has distributed more than 248,000 print versions of these three publications
combined, and consumers have accessed them online more than 760,000 times.
43 Over the last 6 months, the Money Matters website has received approximately 50,000 hits
per month.
44 NeighborWorks America, the Homeowners Preservation Foundation (a nonprofit member of
the HOPE NOW Alliance of mortgage industry members and U.S. Department of Housing and
Urban Development-certified counseling agencies), and other groups are distributing FTC materials directly to homeowners at borrower events across the country, on their websites, in their
statements, and even on the phone. The Nations major mortgage servicers now provide to consumers, while they are on hold, information derived from FTC materials about the tell-tale signs
of a mortgage foreclosure scam.
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5. FTC v. MCS Programs, LLC, No. 09CV5380 (W.D. Wash. preliminary injunction issued July 13, 2009) (debt negotiation)
6. FTC v. Group One Networks, Inc., No. 09CV00352 (M.D. Fla., preliminary
injunction issued March 25, 2009) (debt negotiation)
7. FTC v. Edge Solutions, Inc., No. CV 074087JGAKT (E.D. N.Y., final order
Aug. 29, 2008) (debt settlement)
8. FTC v. Debt-Set, No. 1:07cv00558RPM (D. Colo., final order Apr. 11, 2008)
(debt settlement)
9. FTC v. Select Pers. Mgmt., Inc., No. 07C 0529 (N.D. Ill., final order May 15,
2009) (debt negotiation)
10. FTC v. Express Consolidation, No. 0:06CV61851WJZ (S.D. Fla., final order
May 5, 2007) (credit counseling)
11. FTC v. Connelly, No. SA CV 06701 DOC (RNBx) (C.D. Cal., final order Oct.
2, 2008) (debt settlement)
12. United States v. Credit Found. of Am., No. CV063654 ABC(VBKx) (C.D. Cal.,
final order June 16, 2006) (credit counseling)
13. FTC v. Integrated Credit Solutions, Inc., No. 8:06CV00806SCBTGW (M.D.
Fla., final order Oct. 16, 2006) (credit counseling)
14. FTC v. Debt Solutions, Inc., No. CV060298 (W.D. Wash., final order June 18,
2007) (debt negotiation)
15. FTC v. Jubilee Fin. Servs., Inc., No. 026468 ABC(Ex) (C.D. Cal., final order
Dec. 12, 2004) (debt settlement)
16. FTC v. Natl Consumer Council, Inc., No. ACV040474CJC (JWJX) (C.D. Cal.,
final order Apr. 1, 2005) (credit counseling and debt settlement)
17. FTC v. Better Budget Fin. Servs., Inc., No. 0412326 (WG4) (D. Mass., final
order Mar. 28, 2005) (debt settlement)
18. FTC v. Debt Mgmt. Found. Servs., Inc., No. 8:04CV1674T17MSS (M.D.
Fla., final order Mar. 30, 2005) (credit counseling)
19. FTC v. Innovative Sys. Tech., Inc., No. CV040728 (C.D. Cal., final order July
13, 2005) (debt settlement)
20. FTC v. AmeriDebt, Inc., No. PJM 033317 (D. MD., final order May 17, 2006)
(credit counseling)
The CHAIRMAN. Thank you very much.

Senator McCaskill, do you have aopening thoughts, comments
that you would like to make?
Senator MCCASKILL. Well, I have questions, and I will certainly
defer to the Chairman for questions first.
My thought is that, if doing away with advance fees does away
with these companiesprobably a good thing. Probably a good
thing.
So, I will defer to your questions and look forward to my opportunity to ask questions.
The CHAIRMAN. I think you are looking forward to your opportunity.
Mr. Kutz, Id like to ask you the following. First of all, thank you
for your testimony. And thank you, in fact, for all the work that
GAO does, in general. And I understand that, in your testimony,
youve not named the particular companies youve investigated.
Youve given them case numbers. Its verythats very professional, and its correct. Ive decided that Im not particularly professional, and so, Im just naming the names of all the companies.
And I hope that youll forgive me for that.
So, lets start with what you call case number 1. Your investigators, who were pretending to be financially distressed consumers, started a website called FreeDebtSettlementNow.com
Can you please describe this website?
Mr. KUTZ. Yes. If we could also put up, on the monitor, one of
the advertisements they had on that.
[The information referred to follows:]
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But, actually, Senator, this case came to us through a spam email from Lebanon. And when you actually clicked on the e-mail,
it took you to FreeDebtSettlementNow. And soand, for example,
on the monitor, it shows some of the advertisements they had
about a government program. If you read that, you can see thats
another one of these outrageous cases of false, deceptivein this
case, I call this fraudulent marketing. So, thats a company that
then led youso, theyre one of the front companies that Mr. Lehman described here, and they were funneling work to companies
called Procorp and Web Credit, which are members of the trade associations: TASC and USOBA. And thats where the actual backend processing of the actual debt settlement was.
And within that, there were a whole number of, I guess, deceptive and fraudulent claims. For example, one of the companies
Web Creditclaimed a 100-percent success rateand you heard
that in the tape, at the beginning, or the excerpts in the beginningI mean, 100 percent of consumers successfully settle within
3 years. And, as youve heard from my colleagues at the table,
thats just an outrageous claim.
The CHAIRMAN. All right. And you say, in your testimony, that
Web Credit advisors belongs to a debt settlement industry association, which is called USOBA, United States Organization of Bankruptcy Alternatives. Thats an organization that Mr. Ansbach is
representing here today, is that not correct?
Mr. KUTZ. Thats correct.
The CHAIRMAN. And you also say, in your testimony, that the
telephone representative from Web Credit advisors made multiple
statements that GAO found to be, quote, deceptive or questionable, close quote. Can you please describe these statements, and
explain why they are deceptive, and why they are questionable?
Mr. KUTZ. Certainly. The first one is the 100-percent success rate
for people enrolling in the program. As weve described, I believe
the FTC and the State AGs would say its closer to less than 10
percent. No one knows for sure, I dont think. If you look across the
industry, one of the organizations says its 34 percent. But, 100
percent is something that would not be reasonable to expect under
any circumstances.
Another one says everyone in the program makes the independent decision to stop paying their creditors. Worst-case sce-
78
nario, you will save 40 cents on the dollar. They also promise that
hiring the company would ensure that calls from creditors would
slow down and eventually stop. So, those are combinations, Senator, in my view, of some fraudulent claims or, at a minimum, deceptive or otherwise questionable.
The CHAIRMAN. And, as I think you mentioned before, they sort
of claim to be somehow a part of government activity.
Mr. KUTZ. Yes. In this particular case, you see on the monitor
exactly what they had advertised.
The CHAIRMAN. I think what youve just described to me is outand-out fraud. Im not a lawyer. Senator McCaskill is. And dont
mess with her; shes a very good one.
[Laughter.]
The CHAIRMAN. Mr. Ansbach testified that companies in his organization are honest and ethical. That was in quotes. It sounds
like you dont agree.
Mr. KUTZ. I cant speak to all 150 or 200 companies, but several
of our worst cases were, in fact, members of his trade association,
yes.
The CHAIRMAN. Im just going towere going to have some fun
here, Senator McCaskill. Weve got lots of time and few members.
So, its yours.
STATEMENT OF HON. CLAIRE MCCASKILL,
U.S. SENATOR FROM MISSOURI
Senator MCCASKILL. Ilet me first ask Mr. Ansbach. Mr.

Ansbach, have you made public all the members of your organization?
Mr. ANSBACH. No, maam, we have not.
Senator MCCASKILL. And why not?
Mr. ANSBACH. I think thats something thats going to change.
Weve discussed that. Weve been asked about that. As the Senator
may know, the Association of Settlement Companies does. Thats
our sister group. In the past, the leadership in our trade group,
candidly, was concerned that publishing a list of members ended
up being a subpoena list. We were concerned about
Senator MCCASKILL. Probably a genuine concern.
Mr. ANSBACH. Well, maam, we do think that we represent a lot
of very good folks. But, the reality is, I think that these are good
folks, and we have an agenda item on our conference this summer
to talk about that. I think that all that should be published.
Senator MCCASKILL. Well, Im looking at all the case studies
GAOs case studiesand I see that Prime Debt Services is a member of yours. American Debt Settlement Group is a member of
yours. Credit Solutions of America, Im familiar with, because our
attorney general has sued them. Theyre a member of yours.
You have to understand that the premise of the business is offensive, in this way. The premise is that when people are in debt and
worried, they are more easily persuaded that someone can help
them, because theyre desperate for help. And when someone tells
them, You dont have to pay your bills anymore and were going
to make a lot of your bills go away, that is like asking a 5-yearold if they want to get a Happy Meal. It is equivalent to that. And
what is hard for me to understand is how your association thinks
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you can stop the inevitable march of regulation, lawsuits, enforcement actions, because I dont think you can produce statistics that
show that youre helping anyone.
I have prepared for this hearing. Im not aware of any statistics
that show that youve helped anyone. In fact
And let me ask Mr. Lehman this. Its my understanding, Mr.
Lehman, that one of the problems in these lawsuits that are being
brought by the attorneys general is the fights over discovery, that
it has been very difficult to get the documents, to get the data, to
be able to make sure that every fact is uncovered so that, first, the
members of Mr. Ansbachs organization have due process, but, most
importantly, ifwhether or not these are civil cases for consumer
action, or whether or not these are criminal fraud cases.
Mr. LEHMAN. Yes, Senator McCaskill. That is true; its been very
difficult for the attorneys general to get any verification of any of
the claims that are made.
Senator MCCASKILL. Im sorry. I dont think you have yourdoes
he have his microphone on?
Mr. LEHMAN. Im sorry.
Senator MCCASKILL. Yes. There you go.
Mr. LEHMAN. Yes, it has been very difficult for attorneys general
to get any verification of the claims made by debt settlement companies about success rates and amounts ofnumbers of debts settled and that kind of thing. And I know, in the Credit Solutions
case that you refer to, that the Missouri attorney general has
brought, and along with, I might add, four or five other States,
they have said that it has been very difficult to get information
fromon their investigations of that company.
Senator MCCASKILL. Mr. Ansbach, do you have data that you
could give the Committee today?
Mr. ANSBACH. Yes, maam.
Senator MCCASKILL. OK. And is it data that has beenthat is
subject to our questioning of the companies and getting at theI
mean, are you actually maintaining that the majority of people
that you sell this service to, that you actually produce?
Mr. ANSBACH. Senator, I have data that I would provide to you,
and the only reason I would bring it to you is if I trusted it. What
I can tell you, if I mayand I apologize, I dont remember if you
were in the room when we first startedour members, alone, have
settled $1.4 billion in unsecured debt.
Senator MCCASKILL. And how much was the unsecured debt that
they werethat was the outer perimeters of what they were given
to try to settle? Does that represent 10 percent? Five percent?
Forty percent?
Mr. ANSBACH. Sorry, I dont appreciate the question.
Senator MCCASKILL. Well, you say youve settled $1.4 billion in
debt.
Mr. ANSBACH. That means you have saved your customers that
much debt?
Mr. ANSBACH. No, Im sorry. The aggregate value of the debt that
was
Senator MCCASKILL. OK.
Mr. ANSBACH.held is $1.4 billion.
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Mr. ANSBACH. TASC, the other trade association, last year alone,
settled another $1.1 billion in debt. That debt is settled at roughly
somewhere around 53 to 50 cents on the dollar. So, with all due
respect, Senator, when you say that were not providing any value,
there are a lot of folks that would disagreefolks that received
these settlementsfolks that got their debts settled and ultimately
paid 53 cents on the dollar and who are now on their way to financial stability. I think there is significant value in that.
Senator MCCASKILL. Well, then, why isnt a contingency fee appropriate? Why do you have to have the money up front?
Mr. ANSBACH. Right. The
Senator MCCASKILL. Why is thatwhy do you go out of businessif, in fact, you are successful in settling that percentage of
your debt, there is no way you go out of business with depending
on your success as the parameter for your fee payment.
Mr. ANSBACH. Again, with respect, Senator, I disagree. The issue
is really a very simple one. No business, big or smallbut most of
ours are small business ownerscan operate without revenue for
a year. It cannot be done. I run a business. I dont think youll find
anyone in this room that runs a business that will tell you that it
is a stable financial model to operate without revenue.
Now, please, if thatthat being said, I agree absolutely 100 percent with whats being said here today, particularly about these
egregious ads that have government seals on them. Every time
weve gotten one, weve sent it to the Federal Trade Commission
or some of the Senators that have expressed interest in that. The
question here is not regulation or no regulation. And you said we
cant stop the inevitable march. I dont want to stop the inevitable
march. I spend more time in Sacramento and Tallahassee and Austin and Springfield, Illinois, than I do in my hometown, trying to
get regulation in place. The question is, Can we get regulation that
will protect consumers from this very bad stuff, but still allow honest, ethical companies to provide the services?
Senator MCCASKILL. Well, you now have the premier auditing investigative agency in the world that has now determined that a
number of your members engaged in flat-out fraud
uncontroverted facts. Now, are you going to ask those members to
leave your organization because they have participated in this kind
of activity? Are you going to take any action against them, and
clear out these clearly deceptive practices that are going on? Because I know why these people did this on the phone. They get paid
by how many people they sign up. Correct?
Mr. ANSBACH. Not all do. No, maam.
Senator MCCASKILL. Are you telling me that the people that he
did these case studies onare they all your members, or just some
of them?
Mr. ANSBACH. I do not know.
Senator MCCASKILL. Well, let me read them to you.
Web Credit. Are they one of your members?
Mr. ANSBACH. Senator, we have 200 members. I do not know
all
Senator MCCASKILL. You dont have a list with you?
Mr. ANSBACH. No, maam. I do not.
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Senator MCCASKILL. Youis Procorp Debt Solution a member of
yours?
Mr. ANSBACH. Maam, I just saw the GAO report aswell, actually Ive not seen the report. So
Mr. ANSBACH. I dont know
Senator MCCASKILL. Well, heres whatheresyou understand
the credibility gap that exists in this hearing, I assume, by now.
Mr. ANSBACH. Senator, what I understand is that there are serious problems that we need to talk about. And what I also understand is that there is an attempt to say that, because there are serious problems, that nobody should do business in this industry.
And with that, I absolutely disagree.
Senator MCCASKILL. Well, I will tell you, that since the Chairman is in a frisky moodas Desi Arnaz would say, Youve got
some splainin to do.
There is a serious issue facing this country. I will not sit on this
committeeand I know the Chairmanthe Chairman will not
and I know, having gone through the confirmation for the new
Commissioner at the FTCI cant decide which is worse, the
FreeCreditReport.com or you guys. You are preying upon the fears
of people. Youre making a lot of money, and youre delivering a
substandard product; and many, many times, youre engaging in
fraud to get the customers, by promising something that you know
is not true, that they can quit paying their bills, that youve had
100-percent success, that youre going to settle the debts, and your
record of successand youve had so few dropoutson and on and
on. And, you know, you should just tell your membersand I look
forward to learning allwill you give us the list of all 200 of your
members?
Mr. ANSBACH. Yes, maam, I will talkagain, Im not the legislative director, and Im certainly notIm sorryIm not the executive director and Im not the owner of the trade group. My plan is
to go back to our board and say, This is important and we should
publish the list. So, assuming that, then, yes, maam, you have my
word.
Senator MCCASKILL. OK, well I will be checking in with the Missouri attorney general. We are told that Credit Solutions of America is one of your members.
Mr. ANSBACH. And if they have to keep fighting for discovery, I
think the U.S. Congress is going to have their back. So, I think the
word needs to go outif you can prove what you say, I suggest you
get to proving it.
Mr. ANSBACH. Senator, Im trying my very best with you to say
that anybody that makes a claim of 100 percentIm a born and
raised Texan, so pardon me if say this with some lack of delicacy
lets take him out back and beat him with a stick.
Senator MCCASKILL. Well
Mr. ANSBACH. I mean, I dontyou are not going to find me or
my group, or anybody that believes in responsible service, defending any of that. Now, what I would like to say to you, and Im desperately trying, is to say to you, I have statistics. I have numbers.
I even have some numbers that are specific to Missouri that show
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how much money weve saved consumers in Missouri. Im simply
asking you, please dont throw the baby out with the bathwater.
There are people that do this well, and there are customers that
get help. Two of them are right here with us today.
Senator MCCASKILL.well, Ilisten, Im willingyou know, Im
from the Show Me State. But, its awfully hard, when an organization wont even tell whos in the organization, to take your data
very seriously. And I say that as a former auditor. Youve got to
show the data, and youve got to let us look, and let these attorney
generals look, and let the people that are trying to fight for consumers look, and theyve got to get everything. And if what youre
saying is true, youve got nothing to be afraid of. But, it doesnt appear that way. It appears that everyone has circled the wagons.
Youve told your salespeople, Close them, close them, close them.
Get the money up front. If they drop out, dont worry about it;
weve already made our money. Thats what it looks like, Mr.
Ansbach. And it looks that way to anybody with common sense.
So, Im just giving you the challengeand I know the Chairman
wouldnt have this hearing if he didnt feel the same wayIm giving you the challenge, and telling you, if what youre saying is true,
then youve got to show us.
Thank you, Mr. Chairman.
The CHAIRMAN. Thank you, Senator McCaskill.
I believe the states, Mr. Kutz, that have sued are Texas, New
York, Maine, Missouri, Florida, Illinois, and Idaho. Now, thats just
on case number 6, which is Credit Solutions of America, which is
part of your organization, right?
Mr. KUTZ. Yes, sir.
The CHAIRMAN. Now, you answered that rather quickly, but
when asked by Senator McCaskill about other companiesyou
know, a list of 200 is very small, and you pointed out that you
werent the
Mr. KUTZ. Executive Director, Mr. Chairman.
The CHAIRMAN. Yes. No, that you werent the Chief Compliance
Senator MCCASKILL. [inaudible.]
Mr. ANSBACH. Its OK, maam. II mean, at the risk of perhaps
talking out of turn, I understand the passion in this. Im sitting
two chairs down from Mrs. Haas, who obviously had a horrific experience that I would never, in my life, defend. But, you know, I
have an office full of folks that I believe in very much. I know
sometimes even they make mistakes. But, I think theres good
work to be done here, and I just want to find us a way to do it.
The CHAIRMAN. Thats just an amazing statement.
Let me try to get at it a different way. What percentage of the
people that you say that you serveI mean, 200 companies is a
very small amount. Youre actually the Chief Operating Officer
you corrected meyoure not Chief Compliance, youre Chief Operatingyou have even more reason to know what thesewhat the
200 companies are. But, you dont. You simply dont.
Mr. ANSBACH. Im sorry, Mr. Chairman. Perhaps I misspoke.
Immy role with USOBA, the trade association isIm the volunteer as a Legislative Director. Im the Chief Operating Officer of
just my company.
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The CHAIRMAN. So, you didnt have to getyou didnt have to
pay up front. You didnt have to get paid up front. Im sorry. Im
just being cynical.
Thewhat percentage of the people that you take on, and your
200 organizations take on, do you think do well by their clients?
Mr. ANSBACH. If youll permit me, I want toI know Ive got
some data to provide you with. And, by the way, I want to encourage youif you want to ask questions to anybody else on the panel,
Im sure
The CHAIRMAN. No, youre my interest right now.
[Laughter.]
Mr. ANSBACH. I justI dont want to hog the microphoneso Id
be happy to do that.
The CHAIRMAN. You can joke about this, if you want.
Mr. ANSBACH. No, sir, I dont think its a joking matter at all. I
will tell you that the statistics that weve discussedthe 35-percent
number34, 35 percent, which I think was referencedis a TASC
number. We think that number has merit. That means that 35 percent of consumers will settle all of their debts in a particular debt
settlement program. What that means is that theres still 65 percent that do not complete the program. Its very important to understand what that means. And this is the difficulty weve had with
the discussion on success rates.
The CHAIRMAN. How would you react to that, Mr. Kutz and Commissioner Brill35-percent successful?
Mr. KUTZ. It was 34. Butand I think there may be a question
of what the definition is of success there, because, I mean, I think
successwe would assume that you settle all your debts. I think
the success rate there may have been some or all of the debts. But,
its very different from what the State AGs have found, which is
less than 10 percent. So, certainly less than 50 percent is clearly
makes sense to me, given who youre talking about. And I dont
know if FTC has any further data on that. But, I think less than
34 or34 has got to be the high end of what were talking about.
The CHAIRMAN. Commissioner Brill?
Ms. BRILL. Mr. Chairman, we have asked for this kind of data
as part of our rulemaking procedure, and we are currently analyzing data that has been provided to us, not only by Mr. Ansbach
and some of his compatriots in the industry, but also by the State
attorneys general and others. And at this point, because the rulemaking process is underway, I dont want to comment on my view
or the Commissions view about that data. But, to the extent that
the information we have is public, wed be more than happy to
share that with you. I dont have the numbers with me right here
today. But, wed be more than happy to share what
The CHAIRMAN. OK, well
Ms. BRILL.with you what we have.
The CHAIRMAN.you could have just said that.
Mr. Ansbach, in your testimony, you present a lot of numbers
showing the debt settlement companies that save consumers
money. I didnt hear anything about the numbers showing how
much your industry costs consumers. Remember, in my opening
statement I said they often end up owing more than they did be-
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fore. So, you say that youre saving them money. How much are
you costing them money?
Mr. ANSBACH. If I understand the Senators question, youre asking, What damage does debt settlement, as a program, cause?
The CHAIRMAN. Yes.
Mr. ANSBACH. You know, itsactually, its a very important
question, and it gets to the root of the 35-percent number. In and
of itself, a debt settlement program does not cause damage. What
does cause damage is not paying your creditors. Obviously, thats
whether youre in a debt settlement program or not. What does
cause damageof course, not paying your bills causes damage in
the form of a worsened credit rating or litigation. And thats the
very reason, Mr. Chairman, that I would join with the colleagues
here at the tabledisclosure agreements in contracts must tell people that, If you stop paying your bills, then these things will happen. And that is a disclosure requirement for USOBA. It is a disclosure requirement for TASC. Clearly, the members that have
been related here today failed, and did not, in those respects. And
I know Senator McCaskill has left us, but to that extent, we will
absolutely be following up with those companies.
The CHAIRMAN. I think thatMrs. Haas, didnt you say that you
and your husband owe $20,000 more now than when you enrolled?
Mrs. HAAS. We owed $13,000 more, 6 months after we enrolled,
immediately after we terminated our attorney$13,000.
The CHAIRMAN. So, you ended up owing $13,000 more.
Mrs. HAAS. Thirteenthats not including what we had already
paid our attorney. We had paid our attorney $3,800.
The CHAIRMAN. And, Mr. Kutz and Commissioner Brill, would
you say this is pretty standard? Because, thats the question, Mr.
Ansbach, I was asking youcosting people, as opposed to saving.
Mr. KUTZ. Well, I would say you have the additional fees, plus,
of course, many creditors are going to continue to charge interest,
penalties, and late fees. So, again, how the numbers shake out with
the industry savings, Im not sure how they calculate that, but
theresits a fairly interesting possible calculation you could
make.
Ms. BRILL. I agree. There are different levels of potential damage. And I think that was what your question was getting at. So,
I agree that its something thats important to consider as a whole.
The CHAIRMAN. Mr. Lehman, thewhen a company decides to go
into business, its not my understanding that they raise their capital to go into business from customers and then offer, as an excuse, that, We couldnt havesince we charged you fees up front,
thats the way we could do business. And then, I believe that Mr.
Ansbach said that only went on for a year. But, this has been
around for quite a long time. Does that meando you think he
thinks that, after that first year, that the fees dont have to be paid
up front? It would be my impression that they continue to have to
be paid up front as new customers come in.
Mr. LEHMAN. Mr. Chairman, I think one of the
The CHAIRMAN. I mean, is business done that way in this country?
Mr. LEHMAN. Well, I think any kind of business that you start,
even a law practiceyouve got to start it and youve got to buy
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books, you have to have clerical help, you have to have equipment
of various kinds. I know people who have started a law practice,
and it takesit does take some time to make any money. You do
have to have a capital investment. If youre starting a restaurant
or a car repair shop, you have to put money into it first.
The CHAIRMAN. But, you put your money into
Mr. LEHMAN. You put money into it.
The CHAIRMAN.it first. Somebody else puts their money into it
first. You dont
Mr. LEHMAN. And what
The CHAIRMAN. You dont charge the restaurant customer upfront fees and then feed that person a month or a year later, right?
Mr. LEHMAN. Exactly right. It would be likeyessomebody
contributing to the restaurant today for the privilege of having a
meal, 2 years from now. And that is one of the problems with the
industry, is that the entry barriers are very low. Thats why we
have, by the industrys estimates, over 1,000 of these companies
out there. You need very little money. Most of the work, that weve
found, is outsourced. Somebody can set up a debt settlement company, outsource all the marketing and lead-generation work, can
outsource the work to actually do the negotiations, to the extent
theyre done, can outsource the accounting, the drafting of consumers banks accounts to deposit in the debt settlement account.
And, frankly, this confuses consumers, because they dont know
where the there is, who is actually doing the work. As I gave the
example before, with the law firm, the law firm is out there, in its
name and with the retainer agreement, but it wasnt performing
the services. So, you have this kind of network of companies, and
its hard for the consumers to identify who is the responsible party.
And it could be hard for regulators, too, to determine, you know,
where the real action is.
The CHAIRMAN. Mr. Ansbach, you say youre a volunteer? Are
you here as a volunteer?
Mr. ANSBACH. As hard as it is to believe, yes, sir.
The CHAIRMAN. You believe in it so strongly that youre here as
a volunteer.
Mr. ANSBACH. I have seen the benefits of this program, when
done right. I do believe in it. Yes, sir.
The CHAIRMAN. Why is it, Mrs. Haas, that Im having a hard
time accepting that as anything but a joke?
Mrs. HAAS. Chairman, because Ive been through a lot, I dont believe him, either. I dont think debt settlement should be allowed
to practice any kind of consumer help whatsoever.
The CHAIRMAN. Do you think, if they charge fees before they provide services, which, in most cases, they dont do, that they should
be in business at all?
Mrs. HAAS. Absolutely not. Absolutely not. The attorney that we
had paid took our money and did absolutely nothing. And we got
no refund.
The CHAIRMAN. And if that were the case in, lets say, 60 percent
of all their clienteleand letsand its probably more than that
would that not be enough reason to say they should not be in business at all, that they are harming the majority of their customers?
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Mrs. HAAS. I dont think they should be in business, because of
their illegal practices. They dont follow State and local rules. They
mislead the consumers. And they take their consumers money and
areand the credit reportsthe credityour credit is damaged beyond belief.
The CHAIRMAN. Mr. Kutz, and particularly Commissioner Brill
no, I would say, actually, particularly Mr. Lehmanthethere is
so much of this wein this country, right now and always. Americans can always find a way to skim a buck, and they can always
find a way to take it off of somebody who is in crisis, is desperate,
and who will fall for what they have to say. And they dont have
to make their promise. And the glorious way that America works
is that we concentrate on the big picture and on the big people, and
we dont concentrate on the little people who are hurting and in
trouble. Thats what you do. Thats what you do, and thats what
you do, and thats what you do. And thats what you have suffered
through. Its sad.
My question is, how can they remain in business? And is there
a way, if they are practicing fraudand you say deceptivethe
fraud and deceptive practiceswhy are they in business?
Mr. LEHMAN. Mr. Chairman, as I mentioned, there are many,
many companies out there. If that over-1,000 figure is accurate,
thats a lot of companies. We have a lot of attorneys general that
are interested in this issue that are bringing enforcement actions.
There is no way that we can target the number of companies that
are out there.
And, as I also said, the barriers to entry to this business are very
low, so it is not hard for companies to shut down, move on, and
reopen. So, for enforcement purposes, its kind of like playing a
game of whack-a-mole. You can get a few, but you cannot cover the
whole realm of bad practices out there.
But, Iyou know, theI think the answer is to continue enforcement, to continue cooperative enforcement efforts among the
States, to advocate for strong Federal rules or Federal legislation
and toyou know, and encourage legislation in the states. But,
itsit is a big problem, and its going to take a lot of resources to
address it.
The CHAIRMAN. Is this somethingI mean, I would be delighted
to prepare legislation in this committee. Is this better done by
states?
Mr. LEHMAN. Theas I said earlier, the 41 attorneys general
supported the proposed FTC rule. So, I think its fair to say the attorneys general would approve and appreciate Federal legislation
to create at least a Federal floor of practices for the debt settlement
industry. There are some States that do have laws. And it was interesting for me to see some of the attorneys general of those
States that still advocate for afor Federal law in this area.
The CHAIRMAN. This has already been gone over, but its so utterly repulsive to me that I cant help but talk about. This is one
of their products. And weve had many other hearings on the
scamming of poor people. And we had one which simplysee this
way, this is, Find out if you are eligible, in big blue print.
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And in this previous one, thisthe fact that this was big blue
printand you dont have a lot of small print on here; its down
here. The other one, theres a lot of small print. And so, people sort
of find out if youre eligible. Well, you cant very well say no to
that. Youre desperate. Youve got debts. Youve got people closing
in on you. So, you push it. And then youre kind of hooked into that
thing.
This is thewhat is this? Theyes, thats your Commission.
Now, Mr. Ansbach has already said that hes appalled that this is
on this piece of material. But, this is available broadly, under the
companies that he represents.
And then, I think we have, over here, the Social Security Administration, which strikes me as an enormouslythose twoan enormously cynical attempt toalong with thesort of, the stimulus-
88
package aspect of thisits a cynical attempt to sort of give credibility to a group that doesnt have any credibility.
And I look up here. Wheres that lovely American flag? No. Im
talking about the other chart. Yes. See, now thisIthis is really
wonderful, The future of debt settlement begins with accountability, credibility, and transparency.
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I would say toask Mr. Kutz, Mrs. Haas, Mr. Lehman, Commissioner Brill, How many of those tests do you think that his group
of 200, with this eagle and American flag as their symbol, meet?
Mr. LEHMAN. It doesnt measure up, from the evidence and the
complaints weve received, Mr. Chairman.
The CHAIRMAN. Mrs. Haas, would you have a view on that?
Mrs. HAAS. I know when we looked into our credit counseling on
the Internet, and we found CreditConsumer Credit Counseling of
America, thats what sold us. It was American. Whyyou know, we
cant go wrong. If it says America in there, we cant go wrong.
The CHAIRMAN. And theres no way that you can analyze this, because you havent gotten into it.
Mrs. HAAS. No.
The CHAIRMAN. Commissioner Brill?
Ms. BRILL. We have been very concerned about offers that make
representations that theyre somehow part of the government, part
of the stimulus plan, that have shields like this on it. Weve
brought cases in this area, as have the States. Its a tremendous
concern, for the exact reasons that Mrs. Haas is pointing out. It
lends an air of credibility. That is the concern.
The CHAIRMAN. Well, but the question I was asking Mr. Lehmanand then Ill say Mr. Kutzthey dont measure up on those
three promises, do they? Thats not a question; I shouldnt have
said that. Do they measure up on these three promises?
Mr. KUTZ. All but one of the USOBA members we spoke to and
dealt with did not meet up to them. And the other one, we just
didnt get anything that was notthat was bad, necessarily. One
was reasonably good. The other five or so would not measure up
to those standards, in our judgment.
The CHAIRMAN. OK. I sort of think that weve gotten what we
can out of this. There are a lot of questions. I feel a great sense
of sadness about this. And also angernot denying that there may
be, you know, a couple of your companies that do a good job. And
youve got some nice people sitting in the back who are ready to
89
come up front and testify. But, boy, we sure didnt run into any of
those people. And weve worked very hard, and these are professional investigators behind me, and they are hired on to this committee to dothats what they do, they investigate. They look for
wrong-doers and people who take advantage of people. And we
have a lot of hearings about this. And its very, very sad to me that,
at a time of such economic distress, that there are so many companies, in so many ways with people, whether they are pop-up Internet deals or, you know, all kinds of scams. People fall victim to
them.
I come from the State of West Virginia, where there are a lot of
very, very poor people who are desperate and, for a whole lot of
reasons, are in all kinds of trouble. And theyyou know, they give
their faith to God and their money to these companies. And I dont
know how you-on a net basis, I guess you probably turn out all
right, in that case; but, you certainly dont turn out all right financially.
And I just express disdain and contempt for these kind of efforts.
And I, frankly, am glad there are committees, like us and the Federal Trade Commission, that look for these things and try to stop
them. Weve got to be honest in this country. Weve got to treat our
people with respect. A lot of people dont. Or
Do any of you have closing comments?
Mr. KUTZ. Can I make a comment
The CHAIRMAN. Please.
Mr. KUTZ.on what you said, I mean the faith in God? Interesting thing is, three of the companies used Christianity as the link
to bring people in. Giving, of course
The CHAIRMAN. Good point.
Mr. KUTZ.an air of credibility. Then they provided the fraudulent and deceptive information after that. And I found that, Senator, to be particularly despicable.
The CHAIRMAN. Any others?
Mr. LEHMAN. Mr. Chairman, Id just say, attached to my written
remarks that Ive submitted to the Committee are some other examples of misuse of Federal information or Federal debt relief programs, stimulus money, and that kind of thing. The one that was
blown up, that you just displayed, is one that is running right now.
We heard about that within the last week. And itsif you go onto
the Internet, on many sites, that link will pop up and itsthe one
you showed said North Carolina Relief Act, but there are similar
sites for West VirginiaWest Virginia Relief Act, Florida Relief
Act, and so forth.
So, yes, the problem is still ongoing.
Mr. ANSBACH. Mr. Chairman, just the few last remarks that I
would leave the Committee with. One of the things that we did not
get to today, but I think perhaps the Chairman wants to be sure
that you consider. There does appearand its not just from our
point of view, but consumer activists have stated this, as well
there is going to be some type of a need to help people that cannot
afford credit counseling, but who want to still avoid bankruptcy.
And, in that regard, we have triedobviously with some failing,
but we have tried very hard to fill that particular void. Some numbers say as high as 30 percent of folks cannot afford credit coun-
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seling, but want to avoid bankruptcy. I would simply ask the
Chairman that, as we move forward on this important issue, allow
us to continue to work on this and get better at this, allow us to
join you in condemning some of the particularly egregious ads that
weve seen here today. And we will continue to join, as best as we
are able to do, if you allow us for that.
The CHAIRMAN. That was a touching closing statement. I guess
mine would be, I dont know how you sleep at night.
Mr. ANSBACH. Well, with all due respect, Senator
The CHAIRMAN. This hearing is adjourned.
[Whereupon, at 4:10 p.m., the hearing was adjourned.]
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A P P E N D I X
PREPARED STATEMENT
OF
HON. KAY BAILEY HUTCHISON, U.S. SENATOR
FROM
TEXAS
Thank you, Mr. Chairman, for holding this afternoons hearing. The continuing
home foresclosures, high unemployment, and unprecedented levels of consumer debt
that have accompanied our current economic recession have given rise to new industries tailored to helping those in need. The recession has also given rise to just as
many scams and unscrupulous individuals willing to take advantage of those who
have fallen on hard times. We have a responsibility to understand the services
available to consumers to address their economic troubles and ensure those services
are accompanied by appropriate consumer protections.
As more and more people are being overwhelmed by their debt, there is a greater
demand for debt relief services. Consumers unable to fully repay their debt generally have three choicescredit counseling, where consumers enroll in a program
designed to allow them to pay off the full balance of their debts over a longer period
of time; debt settlement, where a third party negotiates with creditors to lower the
overall balance due from the consumer; and bankruptcy.
Debt settlement can seem very appealing, with promises of lowering the overall
debt owed and avoiding the negatives associated with filing for bankruptcy. Unfortunately, too little is known about the debt settlement industry. It is unclear exactly
how many of these businesses are in operation, how many consumers use their services, andmore importantlywhether the current debt settlement business model
benefits a significant number of consumers.
There have been a number of concerns raised about debt settlement. Foremost
among these is the allegation that many companies use deceptive advertising to lure
vulnerable consumers. These misrepresentations may include promises about settling debts in an extremely short timeframe, for unrealistically high savings, and
without disclosing the actual costs to the consumer. In Texas, such misrepresentations have given rise to more than half a dozen enforcement actions by Attorney
General Greg Abbotts office.
Last fall Chairman Rockefeller commissioned GAO to conduct an investigation
into the advertising and marketing practices of debt settlement companies, and I
am interested to hear their findings.
I am also interested in learning more about the fee structure used by debt settlement companies. Many reportedly charge a significant portion of their fees at the
outset of a consumers program, and critics have expressed concern that these fees
are being paid before any real service has been performed or any debt has been settled. The fee structure is the subject of a current rulemaking at the Federal Trade
Commission, and we are fortunate to have Commissioner Brill here today to discuss
this. I am curious to hear how different fee models work. There is no question that
a business must have revenue to operate. However, there does appear to be the potential for abuse in a system where the majority of fees are paid before any tangible
benefit to the consumer is realized.
I am also pleased to welcome John Ansbach here today as a representative of the
debt settlement industry. Mr. Ansbach, who is from my home state of Texas, is Legislative Director for the United States Organization of Bankruptcy Alternatives
(USOBA) and General Counsel for EFA Processing, based outside Dallas. My staff
has met with Mr. Ansbach on a number of occasions, and he has been a tireless
advocate for the industry, relaying USOBAs support for sound business practices
among debt settlement companies. Mr. Ansbach and other representatives of the industry have worked very closely with the FTC during the creation of their proposed
rule, and I know they support many of its provisions.
Among other things, I understand Mr. Ansbach is prepared to discuss the stories
of some consumers who may have benefited from debt settlement services. At the
same time, we will hear from Mrs. Holly Haas and her husband today. I want to
thank them for being willing to share their experience with us, so that we can better
understand how a consumer can be negatively impacted by a debt settlement program.
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Again, Mr. Chairman, thank you for holding this hearing today. I look forward
to hearing from all of our witnesses.
PREPARED STATEMENT
OF
HON. MARK PRYOR, U.S. SENATOR
FROM
ARKANSAS
I thank Chairman Rockefeller, for holding this hearing on the consumers experience in the debt settlement industry. Todays dialogue is important as many consumers continue to be targeted in a distressed economy.
According to the Commissions 2010 annual report on the Fair Debt Collection
Practices Act, the FTC receives more complaints about the debt collection industry
than any other specific industry. In 2009, the FTC received over 88,000 complaints
about third-party debt collectorscomprising almost 17 percent of all consumer
complaints the agency received that year.
The FTC report also notes that many consumers may never file a complaint with
an entity other than the debt collector. Therefore, consumers may not recognize that
debt collection violations have occurred or that the FTC manages a complaint database and enforces specific consumer protection laws. By extension, this means that
not all consumers experiences may have been recorded.
In Arkansas, abusive debt collection practices appear to be on the rise. Our state
attorney generals staff has reported a steady increase in the number of abusive
debt collection consumer complaints received in the state. In 2007, the state received 510; in 2008, 659 complaints; in 2009, 667 complaints.
As Chairman of the Consumer Protection, Product Safety, and Insurance Subcommittee with oversight authority over the Federal Trade Commission, I recognize
the FTCs important work to enforce against consumer abuse in the debt collection
and debt settlement areas. I look forward to hearing Commissioner Brills perspective and her thoughts about what else should be done.
We also will hear from members of the business community with us today. I welcome their thoughts regarding how to better police the marketplace from actors that
violate consumer protection statutes.
In this tough economic environment, Americans are repeatedly targeted by fraudulent actors seeking to exploit their vulnerabilities. I know today we will hear from
some consumers first-hand about their experience and I welcome their insights.
The investigation instigated by Senator Rockefeller is important and I commend
him for his vigilance and illumination of consumer abuse. As we strive to protect
Americans from unfair or deceptive financial practices, the importance of the FTCs
role in this domain is underscored. I look forward to a robust conversation.
PREPARED STATEMENT
OF
JOHN MARK SPAULDING
Thank you, Chairman Rockefeller, Ranking Member Hutchison, and members of

the Committee for the opportunity to share my experience with you. My name is
Mark Spaulding and I am a resident of South Charleston, West Virginia. I am writing to tell you about an experience I had with a debt settlement company.
A few years ago, my wife and I were both having medical problems and were
starting to fall behind on our bills. I did not want to file for bankruptcy, so I contacted a debt settlement company. In March 2008, I contacted U.S. Debt Settlement
Company (USDS) from an Internet advertisement that I had seen. When I called,
I spoke to a lady and told her I was trying to pay off some hospital bills, some old
and some new. I was asked what other types of unsecured debt I had, and I told
her that I had some credit card debt, but was current with all of my payments. I
was asked how much I owed the hospitals and the credit card companies, and I told
her. I was then asked to fax copies of my bills for them to review.
After the review, I was told that USDS could help me reduce my debt as much
as half, and sometimes for as low as 40 cents on the dollar. I was told they have
the best success with credit card companies. I was also told I could be well on my
way to financial freedom and reestablishing my good financial situation. This all
sounded very good to me, so I went with it.
I filled out an application and gave USDS all of my medical bills and credit card
information. I also gave my banking information so they could automatically withdraw the enrollment fee and monthly service fee. I was asked to sign a power of
attorney form so they could contact my creditors on my behalf. After that, I was
signed up for a 48-month pay-off schedule.
I was told it was best not to have any contact with my creditors, and that USDS
would handle them. Within 2 months the credit card companies were calling me for
payments. I called USDS to ask what I should do. I was told that I should screen
my calls and send any and all correspondence to USDS and they would take care
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of it. I asked if I should let the credit card companies know that I was in a debt
settlement program. They said no, and that if I were to do that, they would not negotiate a settlement. I was reassured that settling with credit card companies is
what they do best.
During that time, calls and letters from my creditors were coming in. Calls at
home and at work seemed nonstop. I would fax the collection letters to USDS and
they said that they would handle it and not to worry.
After paying $296.41 per month for 6 months and $55.00 per month after for service fees, nothing in the way of negotiations had started. I called USDS to ask why
nothing had started yet, and I was told that waiting is all part of the negotiation
process. They told me that I should start saving money to start negotiations, and
wait.
A few months later, I started receiving letters from my creditors lawyers and
summons from the courts. Again, I forwarded this information to USDS, and they
told me not to worry and that this was all part of the negotiation process. At that
point, 14 months had gone by and nothing had been done to settle my debt. I called
USDS to express that I was afraid of being sued by the credit card companies. I
was told I should hurry up and wait. At that point, USDS asked me how much
money I had saved in my banking account. I told them about $1,200.00. They told
me that was not enough to settle anything, and that I should agree to the terms
of the credit card lawyers.
Now I have two judgments against me and will end up paying 40 cents more on
the dollar than I originally owed. In December 2009, my negotiator said bankruptcy
would be my best option. I had paid over $2,400.00 to USDS for a service that I
never received. I was strung along all that time for them to say that they could not
help me. I was furious about the lack of service and their slow response time.
I asked for a refund and was told that they would settle with me for $600.00.
That is when I decided to file a complaint with the West Virginia State Attorney
Generals Office. Since then, USDS has given me a full refund. No one should have
to go through this type of grief from a company that has been entrusted to help with
someones personal finances. Now I am back to square one, only worse off than I
was before. This has been a costly lesson that will take me several years to recover
from.
AMERICAN COALITION
REDUCE DEBT (ACCORD)

Phoenix, AZ, April 20, 2010
Hon. JOHN D. ROCKEFELLER IV,
Hon. KAY BAILEY HUTCHISON,
Chairman,
Ranking Member,
Committee on Commerce, Science, and
Committee on Commerce, Science, and
Transportation,
Transportation,
U.S. Senate,
U.S. Senate,
Washington, DC.
Washington, DC.
Dear Chairman Rockefeller and Ranking Member Hutchison:
The American Coalition of Companies Organized to Reduce Debt (ACCORD) is a
trade association representing debt settlement firms and related businesses that are
committed to ensuring the highest standards of professionalism and integrity in the
debt settlement industry. ACCORD and its members support fair regulation of debt
settlement practices that will fully protect the interests of consumers who can benefit from debt settlement services.
Responsible debt settlement is unquestionably a benefit to consumers, especially
in economic times like these, when large numbers of consumers are facing unmanageable credit card debt. One conservative estimate of the obligations to credit card
issuers and other unsecured creditors that debt settlement companies resolved for
consumers last year is $1 billion.1 Not only do consumers facing financial hardship
benefit from debt settlement, creditors do as well because it allows them to collect
debts that might otherwise be discharged in bankruptcy or sold to debt buyers for
a small fraction of their face value.
Despite these benefits, the bona fide debt settlement industry has suffered from
bad publicity arising from bad actors in the industry and consumers who, for various reasons, did not achieve expected results. Consumer groups and law enforcement have charged some companies with exploiting the financial vulnerability of
OF
COMPANIES ORGANIZED
TO
1 See October 26, 2009, and March 8, 2010, letters from Andrew Housser, on behalf of The
Association of Settlement Companies, to the Federal Trade Commission, available at: http://
www.ftc.gov/os/comments/tsrdebtrelief/index.shtm.
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debt-strapped consumers by taking fees from them and not delivering the promised
services. In some cases, it appears that purported debt settlement firms engaged in
outright fraud.
Often, however, debt settlement firms enroll consumers who simply lack the financial resources to succeed in a debt settlement program. Front-loaded fees provide
a strong economic incentive for debt settlement companies to do this. Consumers
complain when they find themselves unable to save the money needed to settle with
their creditors. They may have already paid hundreds or thousands of dollars in fees
to a debt settlement firm, only to find themselves with unpaid debts to their creditors that have grown even larger through accumulated interest and late fees. When
debt settlement companies have the contractual right to collect fees whether or not
a consumers debts are settled and creditors paid, this sad outcome is often inevitable. Creditors remain unpaid; consumers fall even deeper into debt. The only person who benefits is the debt settlement company.
The essential problem is that, under this fee model, debt settlement companies
have the incentive to sign up every possible consumer for their programs. Whether
the consumer succeeds or not, the company collects its fees. In many cases, careful
screening of potential clients would reveal that a consumer is not a suitable candidate for debt settlement. Debt settlement companies have no incentives, however,
to perform such screening. This is the disincentive the Federal Trade Commissions
current rulemaking would correct.
A key initiative of ACCORD since its 2009 formation has been to support the
Commissions proposed amendments to the Telemarketing Sales Rule addressing
the practices of debt settlement companies and other providers of debt relief services
to consumers. In particular, ACCORD believes that the proposed ban on collecting
fees until services are performed is a vitally important provision, which will benefit
both consumers and the debt settlement companies that work for them.
ACCORD believes that adhering to two principles will generate the respect the
industry deserves from consumers, consumer advocates, Congress, law enforcement,
and the consumer financial services industry.
1. A ban on advance fees; 2 and
2. Fees based on the savings achieved for consumers.
These two principles protect consumers from the nightmare we all feara debt
settlement program that leaves a consumer in worse financial shape than when he
started the program. By agreeing to take no fee until a creditor is paid, and by basing the fee on the amount of savings negotiated, the debt settlement company will
ensure that its client debtors always benefit from its services. ACCORD members
have either already adopted these two principles or pledged to transition their operations to incorporate them in the coming months.
With these two simple changes, a true ban on advance fees and a fee calculation
based on the success of debt settlement negotiations, abuses in the debt settlement
industry can end. These principles align consumers interests with their debt settlement companys intereststhe consumer can work her way out of unmanageable
unsecured debt and the company can earn an appropriate fee for its services.
Critics of the debt settlement industry sometimes point out that some consumers
drop out of the program before a single settlement is negotiated. When that occurs
today, the debt settlement company can usually collect its fee even though the consumer has received no meaningful benefit from the program. This is a situation ripe
for abuse. Careful screening of prospective clients will reduce the chance of enrolling
consumers for whom debt settlement is not a suitable choice. This is precisely the
effect of the Commissions proposed advance fee ban. The debt settlement company
will bear the risk that the consumer will not see the program through to the settlement of her debts.
Some industry members will point out that many consumer drop outs do so
through no fault of the debt settlement firm and that even the most careful screening will not eliminate the problem of drop outs. This is unquestionably true. AC2 The common short-hand reference to an advance fee ban can cause confusion. Some industry members have begun to advocate a pay-as-you-go model, which they define as collecting
a fixed fee on a monthly basis over the first half of the expected duration of the program. This
model, which at best is a very accelerated pay-as-you-go scheme, does little to solve the problem
of collecting fees from consumers unlikely to experience any or much debt relief. It entitles the
debt settlement firm to collect sizable fees regardless of whether any debt is settled. On the
other hand, proposals that require a debt settlement firm to settle all of a consumers debts before collecting any fee go too far in the opposite direction. ACCORD advocates a fair compromise:
the debt settlement firm should be permitted to collect a portion of its fee as each debt is settled
and the creditor is paid the negotiated amount.
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CORD and its members have found, however, that careful screening, excellent customer service, and full disclosure greatly reduce this problem.
The ban on advance fees is an important step in transforming the industry to one
that always works for consumer interests. Alone, however, it is not enough. Equally
important is the concept of a fee based on the companys success for the consumer.
This provision ensures that a consumer will not be left worse off by beginning a debt
settlement program.
Some industry members suggest that abuses can be prevented by simply capping
the fees a debt settlement company can charge, based on the amount of a consumers unsecured debt. ACCORD disagrees. Such an approach still allows companies to collect fees even when the consumer receives no benefit. Even when a settlement occurs, under this approach the net cost to the consumer, including the debt
settlement companys fees, can exceed the original debt. Indeed, ensuring a debt settlement companys right to collect a fee based on the enrolled debt ensures a disconnect between the value of the service and the size of the fee. In contrast, a success-based fee links the consumers benefit and the amount of the companys fee,
providing the debt settlement company with a strong incentive to achieve good results for its clients.
Occasions will exist in which the debt settlement company cannot negotiate a significant savings for the client debtor from a particular creditor. It may seem unfair
to the company to deny it a fee despite its best efforts on the consumers behalf.
This objection does not withstand scrutiny, in ACCORDs view. On average, creditors do negotiate significant reductions for appropriate consumers. Despite the occasional situation in which the success-based fee structure yields no fee, the debt settlement company will generally be able to earn fair fees while achieving valuable
benefits for its clients.
Perhaps the most important issue facing the Federal Trade Commission as it considers its final rule on debt relief service providers is whether to provide a broad
exemption from the advance fee ban when debt settlement services are offered by
licensed attorneys. ACCORD believes that such an exemption is unjustified and will
effectively negate the consumer protection provided by the advance fee ban. Today,
in anticipation of a likely FTC rule banning the collection of fees before debts are
settled and paid, debt settlement companies are affiliating with attorney networks
that hope to circumvent the advance fee ban. If affiliating with attorneys proves to
be an effective strategy for the continued collection of advance fees, the Commission
rulemaking is likely to have little impact on the abusive practices that have concerned the agency and this committee.
ACCORD is grateful for the Committees leadership and continued interest in this
important consumer protection issue. We appreciate the opportunity to make our
views part of the record of this hearing.
Best regards,
JEAN NOONAN,
Counsel.
CONSUMERS UNION
San Francisco, CA
To: Federal Trade Commission, Office of the Secretary
From: Gail Hillebrand, Financial Services Campaign Manager, Consumers Union
Re: Telemarketing Sales RuleDebt Relief AmendmentsR411001
Date: October 9, 2009
Consumers Union, the nonprofit publisher of Consumer Reports, will be filing joint
comments during the extended comment period with the Consumer Federation of
America, the National Consumer Law Center, and other consumer and community
groups. We are also separately submitting this analysis of the white paper entitled
Economic Factors and the Debt Management Industry by Richard A. Briesch, PhD,
Associate Professor, Cox School of Business at Southern Methodist University (August 6, 2009). The white paper has significant limitations that render questionable
its ability to support claims about the level of any benefit to consumers from using
debt settlement services. That report fails to demonstrate that debt settlement services benefit most consumers who sign up for it.
This report was released by the industry-sponsored organization Americans for
Consumer Credit Choice (ACCC) and is branded as ACCC. The report does not disclose whether it was funded by ACCC or by members of the debt settlement industry. The ACCCs website does not disclose its members. When ACCC released the
report in August 2009, it stated that: ACCC, with other industry and interested
groups requested the analysis. (Press Release, Americans for Consumer Credit
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Choice Releases Debt Management Industry Study, August 7, 2009, http://
www.consumercreditchoice.org/node/4.) ACCC also stated that it asked the studys
author for an independent objective assessment of the consumer benefit, if any, provided by debt settlement companies.
The study includes data from only one debt settlement company, which is not
identified. There is no way to tell from the study report if that company, its undisclosed fee structure, practices, dropout rate, or success rate are or are not representative of the debt settlement industry as a whole. In addition, the study does not describe important information relevant to the consumer experience such as the
amount or timing of the fees, the total fees paid by the consumers in the sample
to the debt settlement company, or the amounts by which the debt grew during the
time of the debt settlement program. The study also does not provide data on the
number or percentage of debts settled for all consumers in the sample, nor even for
all of the 40 percent of consumers who did not drop out of the program during the
study period.
The studys author forthrightly admits some of its limitations. The studys author
discloses that: it is unclear whether or not the findings can be generalized beyond
this firm to the industry as a whole. (p. 23) The study also states bluntly that: Accurate measures of consumer completion and cancellation cannot be calculated. (p.
2) For consumers with canceled accountsthose who dropped out of debt settlementthe author states: . . . it is very difficult to determine if value was generated for these customers. (p. 23) The study states that the dataset included no
information about either settlements or offers of settlement for the consumers who
canceled, even though that was more than a majority of the sample.
The study documents a shockingly high cancellation rate.
The study reports that that 60 percent of the customers in the large sample canceled the service within 2 years. (p. 2) The majority of consumers who signed up
for debt settlement dropped out. For more than half of these consumers, the only
reason given in the study for cancellation is other. The consumers who owed the
most dropped out at a higher rate than the overall dropout rate (64.5 percent vs.
60.57 percent overall). (p.15, Table 2)
This is a very high cancellation rate for an industry that often charges substantial
fees upon signing up. The author asserts that a 60 percent cancellation rate is not
excessive because other subscription-based businesses such as wireless service providers also have high cancellation rates. (p.15) However, there is no discussion
about how the fee structures of those services compare to the fee structure in debt
settlement. In addition, consumers who pay monthly for a cell phone also receive
services each month, and are heavily marketed to upgrade their current plans or
to switch companies. In debt settlement, consumers pay sizable fees upfront, and
those who cancel without having any debts settled have not gotten what they
sought- relief from their debts. The median duration of the debt settlement contract
at cancellation was 5 to 6 months.
The study contains incomplete information about the reason for consumer cancellations. Reasons for cancellation are attributed as follows: bankruptcy13.5 percent; inability to save6.8 percent; buyers remorse, that is, cancellation in an initial period of up to 90 days9.2 percent; actual or attempted settlements directly
by the consumer14 percent; and other 56.5 percent. (p.16) Because more than
half the canceling consumers are listed under other, the study gives no detail on
the reasons for cancellation for the majority of consumers who canceled. Categories
such as debt not being settled; unhappy with service; program unsuitable for
the consumer or consumer did not understand the program or promises to consumer not kept apparently were not used.
The author suggests that the cancellation rate is overstated because the debt settlement companys records indicated that 14 percent of those who canceled did so
in order to settle/try to settle on own. (p.16) But these consumers still canceled;
presumably after paying some fees. It is not reported whether those consumers later
settled their debt on their own; but even if they did so there is no reason to attribute that to the efforts of the debt settlement company. In addition, if consumers
did not settle their own debts, those debts presumably may have grown in size before the consumer canceled the debt settlement contract due to creditor charges such
as late fees or penalty interest rates.
With respect to the category of consumers who canceled due to bankruptcy, the
studys author states that these consumers were forced out of the program due to
litigation. A different perspective is that these consumers should have filed for
bankruptcy instead of signing up for debt settlement and saved paying an upfront
fee of perhaps 2 percent to 4 percent to start a debt settlement program.
Common reasons that consumers would cancel any type of service are that they
are unhappy with the service, think it costs too much, or it doesnt meet their expec-
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tations. The large other category may include customers who were signed up for
an unsuitable program, those who were not satisfied with the program, and those
with other reasons. It is simply impossible to tell from this study.
The study cannot support any conclusions about the results for consumers, because
information about any settlements or even offers is missing for more than half the
sample.
The report fails to include any information about debt settlements or offers of settlement for those customers who canceled, because the company studied did not retain this information. (p.17) Consumers who canceled may have experienced worse
results than other consumersthey may not have had any debts settled at all. Indeed, this might be why they chose to cancel. The studys author forthrightly concedes: it is very difficult to determine if value was generated for those customers
[who canceled]. (p.23)
The remaining conclusions are of limited value because they dont reveal what portion of the non-canceling consumers are excluded from the table on consumer welfare
metrics.
For that 40 percent of the sample for which there is data about offers and settlements, the study reports information about the size and frequency of offers and settlements, but only for those consumers who had at least one settlement or one offer
of settlement. The report doesnt disclose how many consumers had no debts settled,
and how many had no offers of settlements. It simply reports settlement data conditional on the client settling at least one account. (p.17) While it is not entirely
clear, it appears that the information about offers also includes only consumers who
had at least one offer. The study appears to essentially divide the non-canceling 40
percent of the sample into groupsthose with at least one settlement or offer, and
those without. The study doesnt disclose the size of each group, and it gives success-related data only for the first groupthose who experienced some success. This
is like calculating average results by first omitting from the average all of the people who received zero results.
The comparison between debt settlement costs and consumer credit counseling costs
attributes some costs to credit counseling that are not paid by the individual in order
to receive that service.
The studys comparison of the relative costs of consumer credit counseling and
debt settlement include payments made by creditors, and not by the consumer, in
the cost of consumer credit counseling. (p.11) The author suggests that creditors
should be indifferent between making a fair share payment to a consumer credit
counseling agency or giving individual consumers a discount of up to the same
amount on the debt. However, the study offers no evidence that this is the case in
practice. In addition, this argument ignores the value that creditors place on the
services that legitimate credit counseling services provide such as education, advice
on budgeting, and overseeing monthly payments to creditors over multiple years.
Since the cost analysis in the study includes some costs not paid directly by the
individual consumers using the service, but instead spread throughout the credit
system, the cost comparison discussion in the study does not provide a valid cost
comparison from the perspective of the individual.
The studys discussion about the relative cost of consumer credit counseling and
debt settlement also does not appear to consider the fact that the 60 percent of consumers who dropped out of debt settlement in the sample still owe all of the debt
they started with; may have paid a set-up fee plus monthly fees or more; and because of late fees or penalty interest rates, may owe more debt at the end of the
program than they did at the beginning on any debt that has not been settled.
The study cites another source stating that the average cost of consumer credit
counseling services with a 5-year plan to pay off debt is $910 paid by the consumer
and another $764.89 paid by the creditors. (p.11) Debt settlement would cost these
consumers much more in fees. If these consumers were charged a total fee of 18 percent fee of the debt, which is within the range cited in the report, then they would
owe an average debt settlement fee of $4,338 (averaging the three mean debt levels
for the three subsamples to yield an overall mean debt for the sample of $24,099).
(See p.15, Table 2; calculation of the overall sample mean by Consumers Union)
These numbers make clear a conclusion not drawn by the report; that consumers pay
much higher service fees for debt settlement than for debt management plans offered
through consumer credit counseling agencies. Of course, it is difficult to compare the
costs of apples and oranges. If consumers do get their debts settled, they should pay
less on those debts, but the report provides no basis to assess how frequently that
occurs overall for the full sample. Also, with a debt management plan administered
by a consumer credit counseling organization, the amount owed falls each month as
the payments are made. That benefit is missing in debt settlement.
The study shows that many consumers did not benefit from debt settlement.
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In spite of the methodological limitations, the numbers reported in the study suggest that the majority of consumers did not feel that they were benefiting from debt
settlement since 60 percent of them canceled. The study also shows that even those
consumers who did not cancel received offers or settlements on less than all of their
debt at each of the three time periods comprising the sample of 12, 18, and 24
months. (p.15)
The studys reported percentages of debts settled appear to be calculated using
only consumers for whom at least one debt was settled. (p.17) These results do not
reveal how many consumers had no debts settled at all. These results also do not
reveal how many consumers came in with the apparent median of four debts, and
left the program with some of those debts unsettled and having grown larger in the
time elapsed during debt settlement program. (p.15, Table 2) This is like estimating
the consumer benefit without averaging in all of the zero benefit people who got no
settlements at all.
Even for those consumers for whom at least one debt was settled, it appears that
the debt settlement provider studied was consistently unable to settle all of the debt
during the time of the sample. (For reasons not disclosed by the author, the study
did not sample results at a time period that matched the usual end time for a debt
settlement program.) The study concludes that conditional on receiving at least one
offer, clients seem to receive offers from more than 67 percent of their accounts and
debts. (p.20) This means that even if the consumer had saved enough to fund all
of the offers, and accepted all of the offers, this would still leave the consumers who
got some offers saddled with 33 percent of the debts they started out with, plus additional creditor charges which might include late fees, additional interest, and perhaps penalty interest, accrued during the time period for debt settlement.
The numbers from the studys tables can illustrate some points not drawn by the
study (Data from study is noted, other calculations are by Consumers Union)
The study examined 4,500 customers of one debt settlement provider. (p.15) Here
is some further analysis by Consumers Union using the average debt, cancellation
rate, and average results reported in the study.
The sample was divided into three groups of consumers, who owed an average
(mean) debt of $7,927; $16,966; and $47,404. (p.15, Table 2) Since each group was
equally represented, this yields an overall initial average debt for the full sample
of $24,099.
Just over 60 percent, or 2,700, of those consumers canceled the program within
6 months to 2 years of entering the program. (p.15) The study doesnt disclose the
total fees paid by those consumers. Using the mean debt in the sample and a 2 percent set up fee, which is the low end of the range cited in the study, those consumers
who dropped out would have paid $1.3 million in fees, and there is no evidence as
to whether or not they received any settlements before leaving the program. Under
the 6 percent set up fee cap promoted by the trade organization USOBA in its recent model act, a similar group of consumers could be charged $3.9 million in frontloaded set up fees before canceling.
Of the 1,800 consumers who remained in the program, the study does not disclose
how many settled at least one account. However, for consumers who did settle at
least one account, the author reports at Table 5 that the mean percent total debt
for the three sub-samples was 54.7 percent, 54.1 percent, and 53.1 percent, respectively. (p.17) The average of those three numbers is 54 percent. In other words, an
undisclosed percentage of the minority of consumers who did not cancel had at least
one debt settled, and among those consumers, 54 percent of their debt was settled
at either 12, 18, or 24 months from entering the program. These consumers still had
substantial remaining debt46 percent of what they started with.
These consumers also had a substantial number of accounts remaining. For the
undisclosed percentage of consumers who had at least one account settled, the percentages of all accounts settled were 52 percent, 51.5 percent, and 53 percent, for
a mean of 52 percent. (p.17, Table 5)
Lets look at those results in plain language:
After one to two years under a debt settlement contract, even those consumers
who had not canceled and who had at least one debt settled still owed 46 percent of the total debt that they owed when they started the debt settlement program, plus whatever amount that debt had grown to during the interim.
After one to two years under a debt settlement contract, even those consumers
who had not canceled and who had at least one debt settled still owed money
on 48 percent of the debt accounts that they brought into the debt settlement
program.
The studys numbers suggest that the 4,500 studied consumers:
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Cancelled at a rate of 60 percent, or 2,700 consumers. (p. 2)
Owed a total of $108.5 million in debt. (extrapolation from table 2, combined
mean debt of $24,099 for each of 4,500 consumers)
Paid $2.2 million in set up fees if they were charged a 2 percent set up fee.
(This is a conservative estimate; the study cites other sources noting a range
of 2 percent to 4 percent set up fees). (p.12)
Lost $1.3 million in those set up fees when 60 percent of them dropped out.
Would owe over $19 million in fees if they were charged an overall fee of 18
percent of the debt, which is within the two ranges cited by the report of 14
20 percent or 1525 percent (this does not include a reduction for any fees still
owed when the consumer dropped out). (p.12)
Continued to owe $85 million in debt one to 2 years after starting debt settlement.
The remaining debt calculation is based on the full initial debt, of just over $65
million, for the 60 percent who canceled and just under $20 million for the 46 percent of remaining debt for those who got at least one settlement. The actual remaining debt number may be higher, because this calculation applies to the entire 40
percent non-canceling group the remaining debt percentage of 46 percent which the
study provides for that subset of consumers in the non-canceling group who received
at least one settlement, and the study does not document or claim that each noncanceling consumer had even one debt settled during the study period. Of course,
the debt numbers could actually be higher because the debt amounts for unsettled
debt can be expected to continue to increase during the settlement program.
The study does not analyze or discuss the cost to consumers of high upfront payments for debt settlement.
The study asserts that charging consumers reasonable upfront fees, i.e., fees before settlement, can be justified but it offers no analysis of the actual fee amounts
charged for debt settlement. (p. 24) The fee structure and fee amounts imposed on
the 4,500 consumers in the sample is not disclosed, and the report also has no discussion of the amount of fees lost by the 60 percent of customers who canceled,
every presumably after paying both a setup fee and monthly fees.
The study also contains some internal inconsistencies.
As released in August 2009, the study contains some inconsistencies and makes
some assertions it does not support. The study states on page 13 that 20.5 percent
of consumers who canceled did so because of bankruptcy, while Table 3 on page 16
says that bankruptcies accounted for 13.5 percent of cancellations.
Table 3 identifies 14 percent of consumers who canceled in order to settle/try to
settle on own, but the text on pages 16 and 20 treats the consumers in that 14
percent as if all of them in fact did pay off their debt on their own.
On page 3, the study says that more than 57 percent of clients have offers to settle at least 70 percent of their debt, but the only table of data to support this, found
at page 17, contains data only on the offers for those consumers who received at
least one offer to settle a debt. Consumers who received no offers are omitted from
the analysis of results, which would bias the reported results upwards by excluding
the zero category from the calculations of mean (average) results.
Analysis prepared by:
GAIL HILLEBRAND,
Financial Services Campaign Manager.
RESPONSE
TO
WRITTEN QUESTIONS SUBMITTED

GREGORY D. KUTZ
BY
HON. MARK PRYOR
TO
Question 1. What is the average fee amount charged to consumers as a percentage

of the consumers unsecured debt?
Answer. We are unable to provide information about the average fee amount
charged to actual consumers nationwide, as this analysis was beyond the scope of
our investigation. However, we were able to obtain fee information from 18 of the
20 debt settlement companies we called while posing as fictitious consumers. Of
these 18 companies, 17 represented that they collect advance fees before debts are
settled. Representatives of these companies told us that the advance fees are calculated based on a percentage of the consumers debts to be settled. The advance
fees cited most commonly ranged between 15 and 17 percent. Moreover, representatives from several companies told us that our monthly payments would go entirely
to fees for up to 4 months before any money would be reserved for settlements with
our creditors. Only 1 of the 20 companies we called represented that it followed a
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contingent fee model where primary fees are charged based on a percentage of the
reduction of debt it says it obtains for consumers (in this case, 35 percent). Some
companies also represented that they assessed monthly maintenance and other fees.
One of the 17 advance-fee companies also revealed that it charged a contingent fee
after each debt is settled based on a percentage of the debt reduction.
Question 2. On average, how long does it take for consumers to buildup sufficient
funds in an escrow account before those funds are used by debt settlement companies to negotiate and reduce the consumers credit card balances?
Answer. We are unable to provide information about how long it takes for actual
consumers to buildup funds to be used for settlements, as this analysis was beyond
the scope of our investigation. However, based on our knowledge of the industry,
the length of time needed to obtain a settlement for a consumer may depend upon
several factors, including: the consumers number of accounts, amount owed to each
creditor, availability of pre-existing funds, the length of time the consumers accounts are past due, and the willingness of creditors to negotiate settlements, among
other things.
Question 3. In instances where consumers with insufficient income indisputably
cannot pay a debt settlement company, how often do debt settlement companies
turn away consumers after their initial consultation?
Answer. We are unable to provide information about how often companies turn
away actual consumers who do not have sufficient income to afford a debt settlement program, as this analysis was beyond the scope of our investigation.
Question 4. Could you describe to the Committee, based on your investigation, the
method of solicitation most often associated with consumer abuse in this area? (Are
you seeing mostly online solicitations touting consumer savings, telemarketing,
mailings, radio advertisements)?
Answer. We did not conduct an assessment of method of solicitation most often
associated with consumer abuses as part of our investigation. However, during the
process of identifying debt settlement companies and selecting 20 companies to call,
we found examples of online, television, print, and radio solicitations, some of which
we found to be fraudulent, abusive, or deceptive. In one case, we identified a company through an unsolicited spam message received by one of our investigators
through his private e-mail account. This message advertised debt settlement services, listed a mailing address in the country of Lebanon at the bottom, and contained a link that took us to the companys website. Most of our investigative work
to identify debt settlement companies was conducted online.
RESPONSE
TO
WRITTEN QUESTIONS SUBMITTED BY HON. MARK PRYOR

WILLIAM AND HOLLY HAAS
TO
Question 1. By what percentage were you told your principal would be reduced?
Did your chosen debt settlement company achieve that level of promised reduction?
Answer. We were told (and its written in the contract) our principal would be reduced to 46 percent of the total debt that we owed. We did NOT receive any reduction from our debt. Instead, numerous fees and penalties were added onto our balances because we were not paying them (as instructed by the debt settlement company). It actually increased our debt approx. $9,000 more than what we owed before
going thru debt reduction for the 6 months that we continued with them.
Question 2. Did your debt settlement company clearly explain to you how your
monthly payments would be used?
Answer. No. The referring company told us that the monthly payments would go
into a holding account where it would stay until there was enough money in the
pot to pay a settlement and pay the attorney fees. They did not tell us that the
$7,500 attorneys fees would be paid first, before the credit card companies and the
debt settlement company negotiated our settlement.
Question 3. What do you believe law makers should do to encourage better protection of consumers from abusive debt collection practices?
Answer. Clearly, there should be some regulation of the way they take your
money. Debt settlement companies, if allowed to exist, should have to document and
prove how much time they work on your settlements each month, and be allowed
to take out a certain percentage each month when they do work on your case, with
a maximum cap of some sort (5 percent) of your monthly payments, just for overhead expenses. Only after they negotiate and the settlement is complete, should
they be allowed to charge and receive payment for their services. What incentive
to do they have to negotiate a settlement if they take their fees off right from the
start? This is how any normal business works, and so it should be for debt settle-
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ment. We also believe that these debt settlement companies should receive heavy
monetary fines if they dont document time as required, (or falsely report time) and
for falsely advertising things that they simply cannot do. They should be licensed
in the same state that they do business, regulated and watched with a paper or electronic trail, and affiliated with credit card companies so the consumer knows that
they are honest and legitimate.
RESPONSE
TO

PHILIP A. LEHMAN
BY
HON. MARK PRYOR
TO
Question 1. Mr. Lehman, consumer complaints related to debt collection are on

the rise in Arkansas. You mentioned in your testimony, In our experience, most
consumers are worse off after enrolling in debt settlement programs. Could you
elaborate upon that for the Committee please?
Answer. The typical debt settlement program requires a consumer to pay substantial advance fees, to cease direct communications with creditors, and to cease making payments on credit accounts. As a result, the consumers limited funds are diverted to the debt settler instead of the consumers creditors. The consumer becomes
further in arrears while interest and default charges mount and the consumers
credit standing deteriorates. Since the consumer is not communicating with creditors, collection efforts intensify and collection lawsuits are more likely. The debt settler offers little protection against collection activity and typically does not begin
settlement efforts for a year or more. In the meantime, the consumer is left to deal
with collection pressure and ballooning account balances.
It is undisputed that the large majority of consumers drop out of these debt settlement programs before they are completed. Many of these consumers cancel because
they are not seeing any results. These consumers may have paid thousands of dollars in advance fees to the debt settler. They are not likely to get refunds because
the fees are deemed fully earned when paid. Therefore, these consumers have lost
valuable time and money due to being sidetracked in a debt settlement program.
Many could have resolved their delinquent accounts directly with their creditors.
Many end up filing for bankruptcy after the debt settlement program fails.
Question 2. Do you think that a fixed-fee pro-rated payment structure over a certain period of time, as proposed by some members of the debt settlement business
community, is a salient solution to the consumer complaints reported by many state
attorneys general?
Answer. No. The prorated payment models we have seen still frontload the consumers fees. Typically, they require the consumer to pay a total of 15 to 18 percent
of the consumers debt as a fee collected over the first 12 months of the program.
Since settlements often do not take place until after a year or more, the debt settlement company gets paid whether it delivers results or not.
Once its fees have been fully earned, the debt settler has little economic incentive
to perform. The program becomes like a Ponzi scheme, requiring new customers to
generate revenue in order to provide services to earlier customers.
Question 3. What do you see as Congresss or the Federal Trade Commissions role
in further preventing consumer abuse in the area of debt collection and other relief
services?
Answer. A Federal role is appropriate because debt settlement abuses are national in scope and most debt settlement providers operate on an interstate basis.
The State Attorneys General, in their public comments to the Federal Trade Commission, have strongly supported the FTCs proposed debt relief services amendments to the Telemarketing Sales Rule. The FTCs proposed Rule comprehensively
addresses consumer abuses through enhanced disclosures, prohibitions on deceptive
representations, coverage of attorney-led debt settlement providers, and prohibitions
on advance fees. S. 3264, the Debt Settlement Consumer Protection Act, sponsored
by Senators Schumer and McCaskill, has a similar comprehensive approach that
will protect consumers.
While the Attorneys General support Federal regulation and enforcement in this
area, it is important that the States have the authority to enforce any Federal laws
or rules. The Federal standards should set a floor of consumer protection and should
not prevent the States from enacting stronger legislative measures.
Question 4. What is our recommendation for better protecting consumers from
debt collection abuses moving forward?
Answer. The debt settlement industry has been characterized by deceptive advertising, misleading representations, spotty performance and the charging of excessive
fees before delivery of services. As noted above, a comprehensive approach as pro-
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posed by the FTC rulemaking and S. 3264 is best suited to address the widespread
consumer protection problems.
However, the key to protecting consumers from future harm is a prohibition on
advance fees. Debt settlement companies should not be allowed to profit while the
consumer loses. North Carolina and now Illinois have adopted strict limitations on
advance fees for debt settlement services. There is precedent for such a prohibition
from regulation of other debt-related services that were notorious for widespread
consumer abuses. Under the Federal Credit Repair Organizations Act and most
state credit repair laws, advance fees are prohibited for credit repair services. The
FTCs Telemarketing Sales Rule bars advance fees in loan brokering, another area
characterized by false promises and minimal performance. Many states currently
prohibit advance fees for foreclosure relief or mortgage loan modification services,
and the FTC has recommended a similar ban in its proposed Mortgage Assistance
Relief Services Rule.
Question 5. What qualities or criteria would help distinguish debt settlement programs that legitimately help consumers versus those that take advantages of vulnerable people?
Answer. A legitimate debt settlement program should have a demonstrated record
of performance and should earn its compensation from successful completion of settlements. Unfortunately, reliable evidence of completion rates and settlement results has not been available from the debt settlement industry. Without such evidence, it is difficult to acknowledge any debt settlement company as beneficial to
consumers.
A more responsible debt settlement program would incorporate the best features
of credit counseling and debt management plans. Consumers would be offered budget and financial planning counseling before beginning any payment program. As
with debt management, consumers would make monthly payments that would be
distributed to creditors under a plan agreed to by the creditors. The consumers
would then be relieved of collection efforts and escalating finance charges. If the
consumer performed under the payment plan, the consumer would receive an
earned benefit of significant principal reduction. This hybrid debt management/principal reduction model is supported by lenders and nonprofit credit counseling agencies but accounting rules from Federal banking regulators have impeded its implementation.
RESPONSE
TO

JOHN ANSBACH
BY
HON. MARK PRYOR
TO
Question 1. What is the range of administrative fees charged to consumers by

your member companies?
Answer. Although USOBA has not surveyed its members to determine the range
of fees charged to consumers by each, USOBA believes that the most common service fee charged by USOBA members is 15 percent of the debt enrolled by a consumer at the time of contract formation. Further, we are pleased to share the following data and statistics, all of which were provided to the Federal Trade Commission in January: 1
(a) 77.58 percent of USOBA member companies providing information in a recent survey primarily use a fixed fee model in which fees are spread out in
a series of payments over a fixed period of time.
(b) 10.34 percent of USOBA member companies providing information in a recent survey primarily use a front-end fee model in which the company requires consumers to pay as much as 40 percent or more of the fee within the
first three or 4 months of enrollment and collects the remaining fee over an ensuing period of 12 months or less.
(c) None of USOBA member companies providing information in a recent survey
primarily use a back-end model in which the consumer pays all of the fee
upon program completion, paying a fee equal to a percentage of total savings.
Question 2. What do you believe is the ideal pay structure a debt settlement company should implement to assist consumers in reducing unsecured debt?
Answer. USOBA believes that the ideal pay structure is the one adopted in
State of Tennessee. Under such a structure, fees are capped not only in amount,
but in timing, as well, i.e., fees are capped at 17 percent of the enrolled debt and
providers are then required to spread fee collection out over half the life of a con1 Please note that the definitions reflected here were provided by the Federal Trade Commission and were posed to USOBA members verbatim.
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sumers program.2 Because programs are typically 34 years in length, this means
that fees must be spread out over a period of 112 to 2 years. Such an approach has
been adopted in Nevada, Colorado, Delaware, Iowa, Montana, Idaho, Tennessee and
Utah and is under consideration in Texas, California, New York and several other
states.
Question 3. Do any of your member companies encourage consumers to discontinue communication with their credit card companies?
Answer. While USOBA cannot speak to the specific practices of every one of its
members, it is against USOBA member policies to encourage consumers to discontinue communication with their creditors. What USOBA does support in this
area is member companies fully informing consumers of their rights as well as providing information, generally, pertaining to the repayment of unsecured debts.
Whether or not to continue servicing any particular debt is ultimately a decision
that consumers must make on their own and in consideration of their own personal
circumstances. It is a debt settlement companys responsibility to arm consumers
with as much information as possible so that such a decision can be made considering all of the facts and consequences.
Furthermore, USOBA would also advise that most of USOBAs members clients
are already unable to meet their monthly creditor obligations by the time they first
contact a debt settlement provider. A recent survey of USOBA members revealed
that approximately 61 percent of consumers were missing debt payments 3 prior to
starting their program. This number climbed to 93 percent when consumers who
would be missing payments very soon were factored in.
In short, although USOBA is aware of instances where consumers have been told
not to pay their bills, USOBA also believes that many if not most potential debt
settlement consumers are already not able to pay their bills when they come to a
debt settlement program. What they need is accurate information to make informed
decisions about how to address their specific situations, and USOBA encourages its
member companies to provide that information.
Question 4. What do you see as the best solution for preventing consumer harm
in the debt settlement sector?
Answer. USOBA believes that the best solution for preventing consumer harm in
the debt settlement sector is a strong state licensing and registration regime, coupled with insurance and/or surety bonding requirements for providers to ensure
ability to address consumer wrongs. While we do believe that the states are best
positioned to articulate appropriate rules and regulations pertaining to contract requirements, as well as reasonable fee regulation, we do also believe that there is
a role for the Federal Trade Commission to play in prescribing debt settlement
rules, regulations and guidelines for what is and is not proper advertising. We
would also respectfully suggest that there is an additional role for the FTC to play
in working with the industry to promulgate appropriate standards for consumer disclosures and a common vocabulary that could normalize disclosures across all forms
of debt relief providers, not just debt settlement companies. USOBA also respectfully suggests that the debt settlement law recently enacted in the State of Tennessee, which contains many of these provisions, should serve as a model for any
effort to prevent consumer harm in the provision of debt relief services.
Further, two additional regulatory and/or legislative tools should be considered to
prevent abuses in the debt settlement sector. First, a change in the United States
tax code regarding debt settlement tax treatment should be considered. In much the
same way that short sales under certain circumstances no longer create a taxable
event (pursuant to the Mortgage Forgiveness Debt Relief Act and Debt Cancellation), debt settled by consumers (through the services of an intermediary and otherwise) should not create a taxable event. This change would remove a major impediment to debt resolution and eliminate abuses created by such taxation.
Second, USOBA would also respectfully suggest the provision of some measure of
protection from creditors for consumers who can demonstrate they are actively,
faithfully working a debt settlement program, similar to the forbearance enjoyed by
customers of credit counseling programs. Because aggressive collection activity is
generally the single most significant reason why consumers are forced to withdraw
from debt settlement programs, often seeking protection in bankruptcy, providing
2 By way of example, if a consumer enrolls $10,000 of debt in a debt settlement program, the
maximum allowable fee would be 17 percent of that debt, or $1,700. That fee would then be
spread out over half the life of the consumers program, or 18 months in an average three-year
program. As such, the maximum allowable monthly fee under this hypothetical would be $94.44
per month ($1,700 in equal payments over 18 months).
3 consistently, often or occasionally
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insulation from collection efforts to those consumers would go a long way toward
raising program completion rates.
RESPONSE
TO
WRITTEN QUESTION SUBMITTED BY HON. KAY BAILEY HUTCHISON

JOHN ANSBACH
TO
Question. Mr. Ansbach, you stated at the hearing that two individuals that had
positive debt settlement experiences had prepared statements about their experience. Please provide copies of those statements to the Committee.
Answer. As requested, please see the statements from Mr. Gary Ross and Ms.
Faith Zabriske, which are attached to this document. Both Mr. Ross and Ms.
Zabriske are individuals who had positive debt settlement experiences and traveled
to Washington, D.C. (from Illinois and Texas, respectively) to tell their stories. They
were both in attendance at the Senate hearing.
TESTIMONIAL
Gary Ross
Harwood Heights, IL
My name is Gary Ross and Ive come here today to tell my story of how debt settlement successfully helped me get my finances in order. Without the option of turning to a debt settlement company, I would be either sinking further into a debt load
from which I would never escape. This industry is very important for people, like
myself, who have fallen into hard times. Please do not take away this option when
you are drafting your legislation.
My story begins 5 years ago. I had always made it a point to pay my debts on
time, but, when I was terminated from my position after thirty-nine years of service,
I was faced with enormous financial hardship. I was out of work for a year and a
half. During this time, I accrued a great deal of debt. And although I was lucky
enough to find a job, my expenses including mortgage, utilities, groceries and credit
card payments seemed insurmountable.
I was paying the minimum on my debts but I couldnt keep up. With the late fees
and high interest my creditors were charging, I fell into even greater debt. I was
scared and felt desperate. I wanted to pay my debts, and I certainly did not want
to file for bankruptcy or I was petrified of losing my home. Even after I got a job,
I was paying the minimum payments and I felt like I would never be able to pay
off everything I owed.
After researching my options, I decided to pursue debt settlement. I had heard
good things and I liked that the debt settlement company would take responsibility
for all of my debts and communicating with my creditors. As soon as I started working with the debt settlement company, I felt relieved. They took over everything.
All of their personnel were polite, understanding and professional.
They explained the program, what was required of me and what I could expect.
I was told the importance of good communication and keeping current with my payments. They explained that while I was accumulating money in my account, they
would make settlements with my creditors. They also explained that if I was sued
by any of my creditors, they would point me to resources that would guide me
through the process. That was exactly what happened! I was sued, but I wasnt
scared. I was able to complete the paperwork and appear in court. This company
gave me the courage to handle court appearances.
After 3 years, I completed the program and am now debt free. I did not lose my
house like I would have in Chapter 7 bankruptcyI have since paid off my house
and I own it. I have to say that without debt settlement, I would not have been
able to resolve my financial problems. I think its very important for consumers like
me to have this option. Please keep that in mind as you look at the industry.
Thank you for letting me tell my story.
GARY ROSS
Distinguished Members of the Committee:
My name is Faith Zabriskie and I live in Bedford, Texas. I am the Director of
Finance for a prestigious downtown Dallas business. While money matters are an
important part of my professional career, like so many American citizens, health
concerns placed me in a difficult financial situation. Without the help of debt settlement, I might have lost my home or wound up in bankruptcy, both of which would
have been devastating on both a personal and professional level.
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In 2007, I suffered an injury to my knee and was forced to turn to my credit cards
in order to pay medical bills and other expenses necessary to survive. I recovered
but was overwhelmed with the debt created by my ordeal.
I contacted my credit card company to find out if they could work with me on repaying my debt. I had an excellent credit score in the high 700s and had always
paid my debts on time. To my dismay, I was told that until I was 6 months delinquent they would not help me.
I tried credit counseling as well, but they were even more unhelpful. Among other
things, they advised me to sell my house and move into an apartment. I simply
could not accept that my only options were losing my home or filing for bankruptcy.
It wasnt until I enrolled in a debt settlement program that I found true support.
After working the program and saving money as needed, my provider was able to
help me settle all of my debts. I am currently making payments on my last account
and am well on my way toward being debt free and financially stable.
I am so thankful to have had debt settlement available to me and I implore you
to preserve it as an option for other American consumers who are so desperately
in need. Thank you for your time.
Best Regards,
FAITH ZABRISKIE
Bedford, Texas
SUPPLEMENT
TO THE
STATEMENT
OF
FAITH ZABRISKE
The following is from an unsolicited e-mail dated May 3, 2010, received by a debt
settlement provider from their debt settlement consumer Faith Zabriske:
I wanted to share with you an absolutely exciting experience that occurred this
weekend but was in the making for the last 2 yearswith the help of your company. . .
As you know, back in 2007, a slip and fall at home resulted in reduced income
thus a fall back on credit cards to make ends meet. Increased rates by the cc companies created disaster and I connected with (your debt settlement company) Prior to the slip & fallI had zero balances on credit cards and a credit score
of 780. My mortgage rate is 3.125 percent. After the fiasco with the credit cards,
my score plunged as low as 480!!!
After 2 yrs and a successful settlement on all accounts (almost debt free)my
score has climbed back.
Trans Union score: 651which qualified for a preferred customer rate with
Honda financeI was able to purchase a new 2010 Odyssey EX-L with easethe
credit report did indicate that several credit cards were paid on a reduced scale
settlement. And, because scores are also based on debt to income ratio, the debt that
was erased through [your companys] negotiations, left a revolving balance $4.0k
down from $90k!!!! And, yes, I was required to pay taxes on portions settledand
planned accordingly. In addition, the paid on time mortgage, utilities, etc assisted
the cause. [Your] consumer counseling encouraged paying these items FIRSTand
then cc debt next.
The Honda Pre-approval processon linewas painless! By following the Consumer Report new car process[I] realized a $4.0k savings via Internet sale and
a waiver of $700 destination fee by choosing a vehicle on their lotpre-visit assisted
choice of dealerby knowing their inventory. Self-education of consumer issues was
also encouraged by your counselors.
I wanted you to know how good it feels to be able to reclaim my lifeprovide for
my familyand truly enjoy the accomplishments of my hard workand the help
and guidance (you) provided played a huge role. . . .
I cant thank you and your team enough!!!!
Best,
Faith
RESPONSE
TO

HON. JULIE BRILL
BY
HON. MARK PRYOR
TO
As I stated in my testimony, in August 2009, the Commission published in the

Federal Register proposed amendments to the Telemarketing Sales Rule (Rule) to
address abuses in the debt relief industry. Given the pendency of the Rule before
the Commission, it would be inappropriate for me to comment on matters on which
the Commission may have to render a judgment in that proceeding. Accordingly, my
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answers are limited to information the Commission has obtained in its law enforcement in this area.
Question 1. In your opinion, why have reported consumer complaints of unscrupulous debt settlement companies been on the rise over the past few years?
Answer. Consumer debt has soared to record levels in the past 2 years, and when
consumers are in financial distress, fraudsters peddling phony solutions generally
follow. As you stated, reported complaints about debt settlement companies have increased in recent years. Complaints to the FTC about debt relief services (which include debt settlement companies) have increased about 18 percent in the last year.
The FTC takes into account the nature and number of complaints it receives when
making enforcement decisions. The Commission has brought eight cases against
debt settlement companies in recent years, alleging that the defendants deceived
consumers into paying hundreds or thousands of dollars in upfront fees through
false promises that they would obtain settlements of consumers credit card debt for
substantially reduced amounts, such as 50 to 60 cents on the dollar. The Commission also has brought a number of cases against other debt relief operations, including actions against sham nonprofit credit counselors and debt negotiators.
In addition, State Attorneys General and state regulators are extremely active in
this area. In recent years, the states have brought 124 actions against debt settlement companies.
Question 2. Based on the cases the FTC has brought and research conducted by
your staff, do these debt settlement companies generally retain upfront and administrative fees even in instances where they have not successfully reduced consumers
debt?
Answer. All of the debt settlement companies sued by the FTC allegedly had fee
structures allowing them to retain all upfront and administrative fees, even in instances where they did not successfully reduce consumers debt. Some of the defendants provided partial refunds in isolated cases when consumers complained, typically to the Better Business Bureau, the State Attorney General, or the FTC, although this appears to have been infrequent.
Question 3. Are there some legitimate companies in the debt settlement industry
that do in fact achieve their stated goals and aid consumers in reducing their debt?
If so, how do they achieve these goals and how do their approaches differ from the
practices of the unscrupulous companies?
Answer. The extent to which there are companies in the debt settlement industry
that achieve their stated goals and aid consumers in reducing their debt is a central
issue in the ongoing rulemaking proceeding. It would therefore be inappropriate for
me to express a view on this issue at this time.
Question 4. You mention in your written testimony the FTC has alleged that some
companies were encouraged to stop paying their creditors while failing to disclose
that not making payments to creditors could increase the amount owed and could
adversely affect their credit score. Could you elaborate on that for the Committee
please? How common is that practice in the debt settlement industry?
Answer. Based on the cases the FTC has brought, many debt settlement companies advise consumers to stop paying their creditors without disclosing that this
could increase the consumers debt burden (through accrued interest and late
charges) and adversely affect his or her credit rating. The FTC has charged five
companies with advising consumers to stop paying their creditors. I also note that
the GAO testified that, out of calls that investigators made to 20 debt settlement
companies, 17 companies encouraged the investigator to stop paying creditors.
Question 5. How does the Commission alert consumers to deceptive financial practices including some abusive debt collection activities and what else do you think
needs to be done to protect consumers?
Answer. To complement its law enforcement and rulemaking activities, the Commission works diligently to educate consumers about deceptive financial practices,
providing information to consumers in both English and Spanish. For example, the
agency recently released English and Spanish versions of a brochure entitled Settling Your Credit Card Debts, which offers struggling consumers tips on how to obtain assistance with their debts and spot red flags for potential debt relief scams.
The FTC has distributed more than 248,000 print versions of this or two other debt
relief brochures in the past 18 months, and consumers have accessed one or more
of them online more than 760,000 times. These materials are now available at a
new FTC web page, www.ftc.gov/MoneyMatters. Over the last 6 months, the Money
Matters website has received approximately 50,000 hits per month.
More broadly, the Commission has conducted numerous education campaigns designed to help consumers manage their financial resources, avoid deceptive and unfair practices, and become aware of emerging scams. For example, the FTC has un-
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dertaken a major consumer education initiative directed at consumers who are
struggling to pay their mortgages. The initiative, which includes a suite of mortgage-related resources for homeowners, explains how to avoid mortgage loan modification and foreclosure rescue scams. NeighborWorks America, the Homeowners
Preservation Foundation (a nonprofit member of the HOPE NOW Alliance of mortgage industry members and U.S. Department of Housing and Urban Developmentcertified counseling agencies), and other groups are distributing FTC materials and
information directly to homeowners at borrower events across the country, on their
websites, in their mailings, and over the telephone.
With respect to abusive debt collection activities, the FTC educates consumers
about their rights and responsibilities in a number of ways. An FTC brochure, entitled Debt Collection FAQs: A Guide for Consumers, explains the Federal Fair Debt
Collection Practices Act in plain language. The brochure is accessible at
www.ftc.gov/bcp/edu/pubs/consumer/credit/cre18.shtm. In 2009, the FTC distributed 123,500 paper copies of the brochure to consumers in response to inquiries to
the FTC and through non-profit consumer groups, state consumer protection agencies, Better Business Bureaus, and other sources of consumer assistance. In addition, online users accessed the brochure on the FTCs website 456,162 times. The
FTC also publishes Spanish-language versions of this and related brochures, including Credit and Your Consumer Rights and Knee Deep in Debt. 1 The FTC distributed 12,400 paper copies of the Spanish version of Debt Collection FAQs in
2009. Online users accessed the brochure in Spanish 7,792 times in 2009. Most recently, in September 2009, the FTC released a video explaining consumer rights regarding debt collection. The video can be found at www.ftc.gov/debtcollection and
www.youtube.com/ftcvideos.
The Commission also provides consumer education through its Consumer Response Center (CRC), whose highly trained contact representatives respond to
telephone calls and correspondence from consumers, in both paper and electronic
form, and provide them with relevant information and materials. A toll-free number,
1877FTCHELP, makes it very easy for consumers to contact the CRC.
The Commission encourages wide circulation of all of its educational resources
and makes bulk orders available to anyone free of charge, shipping included. We
provide FTC materials to State Attorneys General and other local law enforcement
entities, consumer groups, and nonprofit organizations, who in turn distribute them
directly to consumers. In addition, media outletsonline, print, and broadcastroutinely cite our materials and point to our guidance when covering debt-related news
stories. Finally, the FTC extends the reach of its consumer education initiatives
through public speaking engagements to groups across the country.
Question 6. What is your recommendation for better protecting consumers from
these types of abuses moving forward?
Answer. Given the pendency of the rulemaking proceeding, it would be inappropriate for me to express a view as to how to best protect consumers from these types
of abuses. Aside from that issue, I fully expect that the agency will continue to expand both its enforcement efforts and its consumer education initiatives and outreach.
Question 7. What is one example of an egregious and fraudulent debt settlement
practice the FTC has reviewed or resolved, and in your view, how could it have been
avoided?
Answer. As one example, in October 2007 the Commission alleged that four companies and their principals, Robert and Miriam Lovinger, marketed their services
through websites that offered a Debt Meltdown Program, described as an aggressive method of helping consumers out of the debt trap and away from the bankruptcy path. The FTCs complaint alleged that the defendants told consumers that
they would obtain settlements that would substantially reduce the consumers debt.
The defendants allegedly promised to negotiate with creditors and begin making
payments to them within several weeks after consumers joined their program, and
to provide personalized financial counseling. Defendants also allegedly told consumers to have no further contact with their creditors and to stop paying them immediately, enabling the defendants to negotiate for them. The defendants, however,
allegedly failed in many cases to contact each creditor as promised, and consumers
continued hearing from creditors about their debts. In addition, the Commission al1 The Spanish-language version of Debt Collection FAQs (Preguntas Frecuentes sobre
Cobranza de Deudas: Una Gua para Consumidores) is accessible at www.ftc.gov/bcp/edu/
pubs/consumer/credit/scre18.shtm; Credit and Your Consumer Rights (El Credito y Sus
Derechos como Consumidor) is accessible at www.ftc.gov/bcp/edu/pubs/consumer/credit/
scre01shtm; and Knee Deep in Debt (Endeudado Hasta el Cuello) is accessible at
www.ftc.gov/bcp/edu/pubs/consumer/credit/scre19.shtm.
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leged that defendants regularly withdrew money from consumers trust accounts to
pay their operating expenses.
In August 2008, the defendants agreed to settle the Commissions charges. The
settlement barred the defendants from violating the law again and barred the
Lovingers from offering debt settlement services to consumers in the future without
first obtaining a $1 million performance bond. The settlement imposed a $7 million
judgment on the defendants that was partially suspended based on an inability to
pay. The judgment may be imposed in full in the future if the Commission learns
that the defendants misrepresented their financial condition during settlement negotiations. The judgment also required the Lovingers to transfer proceeds from the
sale of property they owned to be used for possible restitution to injured consumers.
The Commission works to prevent scams like this one from taking advantage of
consumers by a combination of aggressive law enforcement (including seeking consumer redress where appropriate), extensive consumer education, guidance to industry as to how to comply with the law, and, where appropriate, promulgating rules.
October 16, 2009
DONALD S. CLARK, Secretary,
Federal Trade Commission,
Washington, DC.
RE: TELEMARKETING SALES RULEDEBT RELIEF AMENDMENTSR411001
Dear Secretary Clark:
These comments are being submitted by Consumer Federation of America,1 Consumers Union,2 Consumer Action,3 the National Consumer Law Center on behalf
of its low-income clients,4 the Center for Responsible Lending,5 the National Association of Consumer Advocates,6 the National Consumers League,7 U.S. PIRG,8 the
Privacy Rights Clearinghouse,9 the Arizona Consumers Council,10 the Chicago Consumer Coalition,11 the Consumer Assistance Council,12 the Community Reinvestment Association of North Carolina,13 the Consumer Federation of the Southeast,14
1 Consumer Federation of America is a nonprofit association of some 300 nonprofit consumer
organizations across the U.S. CFA advances the consumer interest through research, education
and advocacy.
2 Consumers Union of United States, Inc., publisher of Consumer Reports, is a nonprofit membership organization chartered in 1936 to provide consumers with information, education, and
counsel about goods, services, health and personal finance. CUs publications and services carry
no outside advertising and receive no commercial support.
3 Consumer Action is a national non-profit education and advocacy organization that has
served consumers since 1971. CA serves consumers nationwide by advancing consumer rights
in the fields of credit, banking, housing, privacy, insurance and utilities.
4 The National Consumer Law Center is a nonprofit organization specializing in consumer
issues on behalf of low-income people. NCLC works with thousands of legal services, government
and private attorneys, as well as community groups and organizations, from all states that represent low-income and elderly individuals on consumer issues.
5 The Center for Responsible Lending is a not-for-profit, non-partisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices.
6 The National Association of Consumer Advocates is a non-profit corporation whose members
are private and public sector attorneys, legal services attorneys, law professors, and law students, whose primary focus involves the protection and representation of consumers. NACAs
mission is to promote justice for all consumers.
7 The National Consumers League, founded in 1899, is Americas pioneer consumer organization. Its mission is to protect and promote social and economic justice for consumers and workers in the United States and abroad.
8 U.S. PIRG serves as the federation of non-profit, non-partisan state Public Interest Research
Groups, which take on powerful interests on behalf of their members. The PIRGs have long advocated for a fair financial consumers marketplace.
9 The Privacy Rights Clearinghouse is a nonprofit consumer education and advocacy organization, established in 1992 and located in San Diego, CA.
10 The Arizona Consumers Council has been educating, protecting and advocating on behalf
of Arizona consumers since 1966.
11 The Chicago Consumer Coalition advocates for social and economic justice.
12 The Consumer Assistance Council, located on Cape Cod, works with the Massachusetts Attorney Generals office to provide consumer information and to mediate complaints.
13 The Community Reinvestment Association of North Carolina is a bank watchdog agency
promoting and protecting community wealth.
14 The Consumer Federation of the Southeast is a not-for-profit consumer advocacy group
founded in 2003 and dedicated to consumer advocacy in the Southeastern United States. Its goal
is to establish a vigorous, new, pro-consumer agenda built upon public awareness, consumer
education, and coalition-building.
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Grass Roots Organizing,15 Jacksonville Area Legal Aid, Inc.,16 the Maryland Consumer Rights Coalition,17 Mid-Minnesota Legal Assistance,18 and the Virginia Citizens Consumer Council.19
We applaud the Federal Trade Commission (FTC) for its thorough analysis of the
debt relief industry and for the essential amendments that it has proposed to the
Telemarketing Sales Rule (TSR) to protect consumers from abusive practices in debt
relief, including for-profit debt settlement services, debt counseling services, and
debt negotiation services. These amendments are crucial to protecting consumers
from deception and ensuring that they do not pay for false promises rather than real
results.
Summary of Comments
We strongly support the proposed rule, and in particular these crucial elements:
A strong, effective ban on requesting or taking fees in advance of achieving final,
documented results for consumers. We recommend that the results must be
based on the consumers acceptance of the creditors offer, as documented in
writing.
Coverage of calls that consumers make in response to advertisements for debt relief services in the general media. Since for-profit debt counseling, debt settlement, and debt negotiation services are commonly advertised on the Internet,
on television, or by other means which are designed to induce consumers to
make inbound calls, not covering those calls would create a huge loophole.
Prohibitions on specific material misrepresentations. This provides greater clarity to debt relief service providers regarding the types of claims that the FTC
will consider to be deceptive.
Specific required disclosures about how the service works and other important
information. We recommend that these disclosures be made before the consumer
enrolls for the service, whether they have to pay or not at that point.
In addition, we recommend that the TSR should prohibit debt relief services from
these other abusive practices:
Changing the addresses on the consumers accounts so that the debt relief company receives the bills and notices, not the consumer.
Instructing or advising consumers to have no further contact with their creditors.
Instructing or advising consumers not to make any payments to their creditors
directly.
Making any representations about the percentage or dollar amount by which
debts or interest rates may be reduced, or in the alternative, requiring that any
representations about results be based on those which are documented by actual
customer experience over the prior 2 years for all of the debt those consumers
brought into the program.
Failing to provide a money-back cancelation period of at least 90 days in the
contract, plus more time if there has been a material breach of the contract or
a material violation of law.
We further recommend that the exemption in TSR for telephone calls in which
the sale of goods or services is not completed, and payment or authorization of payment is not required, until after a face-to-face sales presentation should not apply
15 Grass Roots Organizing is a 501(c)3 nonprofit organization in Missouri, with a membership
of more than 450 households. Founded in 2000, GROs mission is to create a grassroots voice
for economic justice and human rights for all Missourians.
16 Jacksonville Area Legal Aid, Inc. is a nonprofit law firm that provides free legal services
to low income, elderly and working poor individuals in 17 counties in Northeast Florida. JALAs
consumer law unit focuses on assisting those who have been victims of predatory lending, unfair
collection practices and other illegal business practices.
17 The Maryland Consumer Rights Coalition was founded in Baltimore, Maryland in 2000 to
provide a voice for Maryland consumers. Its mission is to advance and protect the interests of
Maryland consumers through education and advocacy and to ensure fairness and safety in the
marketplace.
18 Mid-Minnesota Legal Assistance is one of the network of Legal Aid programs in Minnesota
that provides legal advice and representation for low-income clients in a wide range of areas,
including consumer law, family law, health law, housing and landlord/tenant law, public benefits law, youth law, disability law, and elder law. Among its services, MMLA, through its Legal
Services Advocacy Project, engages in legislative and administrative advocacy, conducting research and policy analysis and providing community education and training.
19 The Virginia Citizens Consumer Council is a statewide grassroots volunteer consumer education and advocacy organization.
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with respect to telemarketing of debt relief services. This exemption could swallow
the rule, as well as favor some debt relief providers over others.
In our comments we will address the problems in the debt relief industry and why
the proposed amendments to the TSR will help address those problems. We will also
explain why specific language changes and additions are needed in order to improve
the coverage and workability of the TSR in regard to debt relief services. We believe
that strong FTC rules will benefit not only financially distressed consumers but also
creditors who are owed money and legitimate debt relief services that truly provide
consumers with help for their debt problems.
The Proposed Amendments are Sorely Needed
In its Notice of Proposed Rulemaking (NPR), the FTC has vividly described the
pervasive illegal conduct that has occurred as for-profit debt relief services have
emerged.
1. Debt settlement services are fraught with problems.
A debt settlement service promises to attempt to settle credit card and other unsecured debts for significantly less than the full amount owed. However, the consumer
has to save enough to fund those lump sum settlements to each creditor. Settlement
negotiations do not commence until the consumer has saved enough to settle at
least one of the debts involved, and there is no likelihood that all of the debt can
be eliminated unless the consumer saves a very sizable amount of money. Since
multiple debts are often involved, the process may take several years. While the
savings period is running, the debts grow in size due to creditor charges for interest
and penalty fees. Entering a debt settlement program does not stop the consumer
from being called by debt collectors, experiencing negative credit history, being sued
for the debt, and having wages garnished after a judgment.
The fee is often calculated on the amount of the consumers debt or on the projected savings, regardless of whether the debt is ultimately settled or not. As the
FTC noted, there are different fee models, but the most common is the front-end
fee which requires consumers to pay a significant portion of the total amount within the first few months and the balance within a year or lessoften well before any
negotiations have taken place. Individuals who cant save enough to settle their
debts end up paying hundreds, even thousands of dollars but getting no benefit in
return. The so-called flat fee approach also involves significant fee payments well
before any settlement is achieved. For example, the consumer may be charged a setup fee of from 2 percent to 4 percent, plus additional fees until the fees total from
14 percent to 20 percent of the full amount of the original debt brought into the
settlement program, with the entire percentage fee paid over the first half of the
program.20
Non-completion rates are very high and the rate of successful settlements is very
low, as we will discuss further in our comments on the proposed prohibition against
advance fees.
Earlier this year, Consumer Federation of America (CFA) testified before Congress that debt settlement firms often mislead consumers about the likelihood of a
settlement, cannot guarantee that a creditor will agree to a reduced payment, often
mislead consumers about the effect of the settlement process on debt collection and
their credit worthiness, and charge such high fees that consumers often dont end
up saving enough to make settlement offers that a creditor will accept, causing
many consumers to drop out of the program.21
The problems consumers face in debt settlement have been much in the news:
The New York Times reports that consumers rarely benefit from debt settlement
services. More often, they say, a settlement company collects a large fee, often
15 percent of the total debt, and accomplishes little or nothing on the consumers behalf. Debt Settlers Offer Promises But Little Help, New York Times,
April 19, 2009.22
20 Economic Factors and the Debt Management Industry, Richard A. Briesch, PhD, Associate
Professor, Southern Methodist University, August 6, 2009, at 12, available at http://
www.consumercreditchoice.org, see also Keest, supra.
21 Testimony of Travis B. Plunkett on behalf of the Consumer Federation of America, the National Consumer Law Center, and U.S. PIRG before the Committee on Commerce, Science, and
Transportation of the U.S. Senate regarding consumer protection and the credit crisis, February
26, 2009, http://www.consumerfed.org/elements/www.consumerfed.org/File/PlunkettlTestimo
nylSenatelCommercelFebl26(3).pdf.
22 http://www.nytimes.com/2009/04/20/business/20settle.html?lr=1&emc=eta1.
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The New York Attorney General Andrew Cuomo has called debt settlement a
rogue industry. Cuomo Subpoenas Debt Settlement Firms, Los Angeles Times,
May 8, 2009.23
Debt settlement was identified in the March 2009 issue of Consumer Reports
as one of five financial traps. Financial Traps are Flourishing, Tough Times
Have Bred Five Costly Come Ons: High Fee Debt Settlement, Consumer Reports, March 2009.24
The CBS Morning News says that complaints to the Federal Trade Commission
about debt settlement more than quadrupled between 2006 and 2007. Debt
Settlement Can Hurt More Than Help, May 12, 2009.25
Smart Money reports that using these companies is fraught with risk, not to
mention outrageous fees. Debt Settlement: a Costly Escape, August 6, 2007.26
The Better Business Bureau of Los Angeles, Orange, Riverside and San
Bernardino Counties offers this caution about debt settlement services:
Complaints on these companies allege that creditors continue to harass clients,
fees and interest continue to accumulate, and that the companies do not contact
the creditors. Usually, creditors turn the claims over to collection agencies, file
suit and pursue collection of the money owed to them. Debts are seldom settled,
customers credit is ruined, and many people are sued forcing them to seek
bankruptcy protection. Typically, it is difficult to obtain refunds from the companies.27
The FTC and state agencies have brought many cases against debt settlement
companies. The FTC case against Edge Solutions, Inc. provides a good example of
the types of problems that consumers have encountered with debt settlement services.28 The company allegedly promised to reduce consumers debts to 55 cents on
the dollar; told consumers to stop making payments to their creditors, which would
place them in a hardship condition, making negotiations possible; promised that
debts would begin to be paid to creditors within several weeks; required consumers
to set up direct debits from their bank accounts to an account controlled by the company, from which their fees and debts would be paid; promised one-on-one financial
counseling, which in most cases was never provided; buried in the agreement the
fact that consumers must pay 45 percent of the total fee upfront before any payments would begin to creditors and that this might take several months; failed to
negotiate with and pay creditors as promised; and caused consumers to incur late
fees, finance charges, overdraft charges, and negative information on their credit reports, and to face various types of legal action by creditors.
In its Congressional testimony, CFA concluded that, The essential promise made
by debt settlement firms to the public, that they can settle most debts for significantly less than what is owed, is often fraudulent. There is general consensus that
credit counseling, if done well, can provide significant benefits for some financially
distressed consumers. No such consensus exists for debt settlement. 29
2. The proposed amendments wisely cover all types of for-profit debt relief services.
The FTC has taken the correct approach in covering all types of for-profit debt
relief services in the proposed amendments to the TSR. While they may operate differently,30 for-profit debt counseling, debt management, and debt negotiation services share some of the same characteristics as debt settlement services (in fact,
sometimes the terms debt settlement and debt negotiation are used interchangeably). These businesses often charge significant fees upfront and make representa23 http://articles.latimes.com/2009/may/08/business/fi-debt-relief8.
24 http://www.consumerreports.org/cro/magazine-archive/march2009/money/scams/highfee-debtsettlement/scams-high-fee-debt-settlement.htm.
25 http://www.cbsnews.com/stories/2009/05/12/earlyshow/living/money/main5008357
.shtml.
26 http://articles.moneycentral.msn.com/SavingandDebt/ManageDebt/DebtSettlement
ACostlyEscape.aspx.
27 http://www.la.bbb.org/BusinessReport.aspx?CompanyID=100046948.
28See FTC press release at www.ftc.gov/opa/2008/08/edge.shtm.
29 Testimony of Travis B. Plunkett on behalf of the Consumer Federation of America, the National Consumer Law Center, and U.S. PIRG before the Committee on Commerce, Science, and
Transportation of the U.S. Senate regarding consumer protection and the credit crisis, February
26, 2009, http://www.consumerfed.org/elements/www.consumerfed.org/File/PlunkettlTestimo
nylSenatelCommercelFebl26(3).pdf.
30 Debt management services offer to make arrangements for consumers to pay their entire
debts with reduced interest rates and fees and over longer periods of time; debt negotiation
firms offer to make consumers debts more affordable by obtaining lower interest rates and other
concessions from the creditors.
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tions that lead consumers to believe that they will get debt relief in returnrepresentations that are sometimes false.
A 2003 report 31 by the National Consumer Law Center (NCLC) and CFA about
credit counseling and debt management programs described problems with some
debt management services, including: failing to make consumers debt management
program on time, or at all; deceptively claiming that fees are voluntary; not adequately disclosing fees; charging excessive fees; and falsely purporting to be nonprofit organizations. The report also noted that newer entrants in the industry were
generally more aggressive in their marketing tactics, particularly with Internet and
telemarketing advertising.
The FTC has cited many enforcement actions against debt counseling and debt
negotiation services that illustrate the need to protect consumers by bringing these
companies under the amendments to the TSR. For instance, in the largest debt
management cases ever brought by the FTC, AmeriDebt allegedly misled consumers
into believing that it was a nonprofit credit counseling service that would teach
them how to handle their debts.32 Instead, it enrolled them in debt management
plans operated by a service provider. Furthermore, contrary to AmeriDebts claims
that there were no upfront fees, it kept consumers initial payments as fees rather
than disbursing them to creditors as promised.
In the case against Debt Solutions, Inc., the FTC alleged that the company
charged consumers hundreds of dollars for a debt elimination program that, despite its claims, did not greatly reduce interest rates or result in thousands of dollars in savings as represented.33 Furthermore, consumers were not told that the
promised savings would take decades to achieve and that the majority of savings
would come from increasingly paying more toward their debts every month, not
from reduced interest rates.
To protect consumers from deception and abuse, all types of for-profit debt relief
services should be covered by the proposed amendments. If debt counseling and debt
negotiation services were not included, some debt settlement companies might try
to escape the requirements and prohibitions by claiming to be engaged in those
businesses instead. Furthermore, as the FTC has seen, some companies provide a
range of debt relief options. For instance, Debt-Set offered a debt consolidation program for consumers whose unsecured debts were overdue by 1 month or less and
a debt settlement program if the debts were overdue by a longer period.34 The
FTC must be careful not to create any loopholes that would allow some businesses
to escape the rules that apply to their competitors.
We agree that product should be added to the definition of debt relief service
so that the rules cannot be evaded by recasting the service as a product. In addition,
we suggest adding or seek to alter to the definition to avoid creating a loophole
for services that might simply claim to attempt to alter the terms of the debt. The
revised definition in 310.2 (m) would read:
Debt relief service means any product or service represented, directly or by implication, to renegotiate, settle, or in any way alter or seek to alter the terms
of payment or other terms of the debt between a consumer and one or more unsecured creditors or debt collectors, including, but not limited to, a reduction in
the balance, interest rate, or fees owed by a consumer to an unsecured creditor
or debt collector.
Key Aspects of the Proposed Amendments
1. Advance fees must be prohibited to prevent substantial consumer injury.
We strongly support the proposed restriction in section 310.4 (a)(5) to ban fees in
advance of consumers actually getting the services they are paying for. The FTC has
proposed that debt relief services should not request or receive any payment until
providing the customer with documentation that the particular debt has been renegotiated, settled, reduced, or otherwise altered. We agree that this is essential to
protect consumers from the substantial injury that is caused when they pay fees upfront and little or no services are ever rendered.
Consumers pay significant fees for debt relief services, often before any services are
actually provided.
31 Credit Counseling in Crisis: The Impact on Consumers of Funding Cuts, Higher Fees and
Aggressive New Market Entrants, National Consumer Law Center and Consumer Federation
of America, April 2003, http://www.consumerfed.org/elements/www.consumerfed.org/file/finance/creditlcounselinglreport.pdf.
32 See FTC press release at www.ftc.gov/opa/2008/09/ameridebt.shtm.
33 See FTC press release at www.ftc.gov/opa/2007/05/dsi.shtm.
34 See FTC press release at www.ftc.gov/opa/2008/02/debtreduct.shtm.
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Consumers pay significant amounts of money for debt relief services. For instance,
Homeland Financial Services and four other companies charged non-refundable fees
of up to 15 percent of consumers unsecured debts with the promise of reducing
those debts by as much as 40 to 60 percent.35 This seems to be typical of debt settlement companies; whether the fees are based on the total amount of debts or the
projected savings, they appear to range from 14 to 20 percent.36 For instance, for
debts totaling $25,000, the consumer would pay $3,500 to $5,000 if the fee was
based on the amount of the debt, which seems to be the most common method of
calculation. This is a very large amount of money, especially for consumers who are
already in financial distress.
Furthermore, as in the case of Homeland Financial Services, negotiations with the
creditors usually begin only after the consumer has paid a large percentage of the
fees. One company representative at the FTCs September 2008 Public Workshop on
Consumer Protection and the Debt Settlement Industry indicated that in the
front-end fee models consumers could pay 40 percent or more within the first three
or 4 months, 65 percent within 6 months, without any results at that point. 37 We
also note the comments at that workshop of the United States Organization for
Bankruptcy Alternatives acknowledging that Some business models call for the fee
to be paid up front in its entirety, over the first several months of the program prior
to any negotiating with creditors takes (sic) place. 38 The flat fee model, the second
most common according to industry representatives at the workshop, works similarly, with the entire amount collected over the first half of the enrollment period.
As we commented previously, debt settlement negotiations cannot start until consumers have saved enough money for the service to make offers to their creditors.
That can take years, depending on the amount of the debt, the willingness of various creditors to cooperate, and the consumers capacity to save. For consumers with
multiple debts, negotiations are typically initiated in sequence; when one is settled,
the consumer starts saving for the next. This stretches the process out even further.
Debt settlement companies typically advertise that they will help consumers become
debt free within two to 4 years; none claim that they can resolve debt problems
in less than 12 months.39 Part of the reason why the process takes so long is that
in addition to saving funds toward a settlement, consumers are paying a substantial
portion of the fees upfront.
Meanwhile, the consumers are instructed not to make any payments to their
creditors, or even to have any contact with them. Even if a settlement company does
not explicitly direct customers not to pay their creditors, such encouragement is implicit. There is simply no way that the vast majority of highly indebted consumers
can save enough to make a viable settlement and pay fees without reducing or
eliminating the payments they make to creditors. By the time settlement negotiations begin, if at all, consumers debts have become higher because of interest and
penalties, and the amount of money at their disposal has been reduced by the fees
they have paid, diminishing the chances that they will be able to make viable offers
to their creditors.
For-profit debt negotiation and credit counseling companies also charge significant
fees before providing services. Debt Solutions charged $399 to $699 in advance for
its debt negotiation program. Consumers paid $675 upfront to Select Management
Solutions, which promised to reduce their credit card interest rates. When the service, which consisted of three-way telephone calls with their credit card companies,
did not produce the results that consumers were led to expect, the company allegedly refused to honor its refund policy.40 National Consumer Council, masquerading
as a nonprofit credit counseling service, debited $500 from consumers banks accounts as an establishment fee and $50 per month thereafter from the monthly
payments that consumers thought were going to their creditors, without disclosing
35 See
FTC press release www.ftc.gov/opa/2006/09/nationwide.shtm.

comments to the FTC by The Association of Settlement Companies, December 1, 2008,
page 2, http://www.ftc.gov/os/comments/debtsettlementworkshop/53679600036.pdf.
37 See U.S. Debt Resolve (Johnson), Tr. at 7274 mentioning that 40 percent or more is collected within the first three or 4 months and the rest in 12 months or less and again at Tr.
108 that 65 percent of the fees will be paid in 6 months and the client wont have any results
at that point in time.
38 See http://www.ftc.gov/os/comments/debtsettlementworkshop/53679600022.pdf, page 12.
39 See Debt Consolidation Care at http://www.debtconsolidationcare.com/debt-settlement
.html, Fidelity Debt Solutions at http://www.fidelitydebt.net/debt-consolidationlp1.html?s=gaw
&kw=Debt%20settlement&gclid=CIayr5ikip0CFQ62sgod9xz32Q, FixYourDebtProblems.com at
http://www.fixyourdebtproblems.com/debt-relief-help-settlement/, Debtamerica Relief at http://
www.debtmerica.com/a/debtsettlementlgoogle.html?gclid=CND21LGmip0CFSTFsgod
qlEd3g.
40 See FTC press release at www.ftc.gov./opa/2008/08/smsomax.shtm.
36 See
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that the company would not start negotiating a payment plan with creditors until
6 months or longer had elapsed.41
Disclosures and prohibited misrepresentations, no matter how effective, are inadequate to prevent substantial injury by themselves. Unjustified fees and abusive practices must also be prohibited.
While the disclosure requirements and prohibitions against misrepresentation
that the FTC has proposed are helpful, they alone are not sufficient to prevent the
substantial injury that the FTC has described. As the FTC has correctly pointed out,
when consumers are considering debt relief services, they have no way to know
whether the representations being made are true or not; they can only judge that
after they have enrolled (sometimes long after), when the programs have either produced results or failed to do so.
Furthermore, consumers who need help with debt problems are often in very
stressful situations. A survey CFA recently conducted showed that the fastest growing complaints that state and local consumer protection agencies received last year
were about aggressive debt collection practices.42 As the FTC noted in the NPR, this
makes consumers very vulnerable when they respond to solicitations that promise
them relief. The required disclosures that the FTC proposes will help consumers understand the total cost of debt relief services, how they work, and what other alternatives may be available. But desperate consumers will tend to focus most on the
representations made in the advertisements about how these services can relieve
them of their debt worries. We see the required disclosures and prohibited misrepresentations as good complements to, but not substitutes for, the proposed ban on advance fees.
It is abusive to charge fees in advance for services when most consumers do not
benefit.
The information that the FTC and state agencies have gleaned from enforcement
actions against debt relief companies revealed extremely low success rates. The vast
majority of consumers who signed up for those services derived absolutely no benefit
in exchange for the fees they paid. For example, in the case against National Consumer Council, the court-appointed receiver found that only 1.4 percent of consumers obtained the promised results.43 In recent New York cases against debt settlement companies, the state attorney general alleges that only 1 percent and 13
percent of consumers received the services they were promised.44
The Center for Responsible Lending (CRL) testified in Congress in 2009 that the
debt settlement business is inherently problematic because it specifically targets
consumers who are least likely to complete their programs. CRL said that the business model which requires consumers to pay between 14 and 20 percent of their
debt in fees before they can reach a settlement means that few were likely to benefit
and most were likely to drop out because they could not keep up the monthly payment to the debt settlement company and save funds for settlements at the same
time.45
In case after case against various types of for-profit debt relief services, the FTC
has found that very few, if any, consumers got real help with their debt problems
after having paid hundreds, even thousands of dollars in fees. We agree with the
FTC that it is an abusive practice to charge consumers in advance for debt relief
services that they are likely never to receive. Not only do financially distressed consumers lose what little money they have left to the high fees charged by these companies, but they are left worse off than they were before when the promised results
are not achieved, facing higher debts, further damage to their credit records, and
the possibility of lawsuits and wage garnishment. In this respect, the consumer
harm is more severe than in situations involving recovery services, credit repair,
and advance fee loans.
Furthermore, even in the minority of situations where the results are achieved,
that is often long after the consumer first enrolled. In the meantime, it is not clear
what services have been provided for which the firms should be compensated beyond
a de minimus amount, as we will discuss later. This situation is very similar to that
of credit repair, in which there is little evidence of success and a long lag time be41 See
FTC press release and link to complaint at http://www.ftc.gov/opa/2004/05/ncc.shtm.

press release with link to 2008 Consumer Complaint Survey Report, July 30, 2009,
http://www.consumerfed.org/elements/www.consumerfed.org/File/Consumer%20Complaint%20
survey%20Report%20PR%207-30-09.pdf.
43 See FTC press release at http://www2.ftc.gov/opa/2005/03/creditcouncel.shtm.
44 See press release at www.oag.state.ny.us/medialcetner/2009/ma/may19bl09.html.
45 Testimony of Kathleen Keest on behalf of CRL, CFA and NCLC before the House Committee on Energy and Commerce, Subcommittee on Commerce, Trade and Consumer Protection,
May 12, 2009, www.responsiblelending.org/credit-cards/policy-legislation/congress/ftc-ccdp-testimony5122009final.pdf.
42 See
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fore results, if any, are achieved. The approach that Congress took in addressing
this problem was to enact the Credit Repair Organization Act, which bans advance
fees.46 That is the correct approach here.
Industry has not provided reliable, credible empirical evidence of the value or success of for-profit debt relief services.
There has been no reliable, credible empirical evidence from industry of the value
or success of for-profit debt relief services. In researching the debt settlement industry for a 2005 report, NCLC found that it was very difficult to obtain information
from companies or industry associations and was forced to conclude that Unfortunately, it is not easy to determine what the companies actually do to earn these
fees. 47 As the FTC has noted, what little information has been provided by the
debt settlement industry fails to show the success ratethat is, the number or percentage of consumers who pay for services and fully achieve the promised results.
A recent study 48 released by Americans for Consumer Credit Choice (ACCC) does
not provide this evidence. There is no list or other information about the ACCCs
members on its website, but it appears to be a debt settlement industry group.49
The study is based on data of 4,500 customers from only one debt settlement company, which is not identified. The author contends that this is a very significant
sample of consumers in this industry. 50 However, there is no information about
what percentage of the companys customers, or of the industry as a whole, this represents to support that contention. There is also no information about the companys
fee structure.
The author points to other limitationsfor instance, the company does not retain
information regarding offers and settlements for consumers who dropped out of the
programand acknowledges that the results from this company may not be applicable to the industry as a whole.
We also note that there is no explanation of how this company was selected for
the study, or by whom. While the data cannot be taken as representative of all debt
settlement companies, if this is an example of the industry at its best, it reveals
some serious shortcomings. For example, a shocking 60 percent of customers canceled their participation in the program before completing it. The author touts this
drop-out rate as better than the 80 percent 51 or more that some have described as
typical of debt settlement and compares it favorably with the churn rate for subscription services such as mobile phones.
We would not characterize the majority of customers dropping out of a debt settlement program before completing it as a good result, especially when there is no evidence that any of the drop-outs settled even one of their debts through the companys efforts. Furthermore, the comparison to the churn in the wireless phone industry does not fit. Cell phone customers dont usually pay in advance of receiving
the service, as debt settlement customers do. And many undoubtedly switch their
wireless service provider because another one has offered them a better deal. Its
unlikely that debt settlement customers drop out because another debt settlement
company has offered them a better deal.
Given the predominant front-loaded fee structure in the debt settlement industry
and the fact that the customers of this company who canceled had been in the program for a median of 5 to 6 months (and some for much longer), we can assume
that many paid a substantial portion of their fees before dropping out. The report
provides explanations for why some customers canceled (13.5 percent of the dropouts filed for bankruptcy, 6.8 percent were unable to save, 9.2 percent had buyers
remorse within the first 2 or 3 months, and 14 percent settled on their own or were
going to try to do so), but there is no explanation for why more than half (56 percent) of those who dropped out did so. Some may well have been discouraged after
paying fees for months and getting no satisfactory results. It also seems clear that,
with such a high cancelation rate, the settlement firm was enrolling customers in
the program for whom it was not appropriate in the first place. In fact, it seems
46 15
U.S.C. 1679 et. seq.

Investigation of Debt Settlement Companies: An Unsettling Business for Consumers,
National Consumer Law Center, March 2005, http://www.nclc.org/issues/creditlcounseling/
content/DebtSettleFINALREPORT.pdf.
48 Economic Factors and the Debt Management Industry, Richard A. Briesch, PhD, Associate
Professor, Southern Methodist University, August 6, 2009, available at http://
www.consumercreditchoice.org.
49 The August 7, 2009 press release states that ACCC, with other industry and interested
groups requested the study, see http://www.consumercreditchoice.org/node/4.
50 Id. page 15.
51 Look Out for That Lifeline, Debt Settlement Firms are Doing a Booming BusinessAnd
Drawing the Attention of Prosecutors and Regulators, BusinessWeek, March 6, 2008.
47 An
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likely that this company made little or no effort to determine suitability at all,
which we believe should be a requirement for all debt relief services.
Of the 40 percent still in the program, the report does not make clear how many
had actually settled even one of their debts. The report provides results only conditional on settlement of one debt or receipt of one settlement offer. No statistics are
provided in the published report for the people who had no debts settled. CFA asked
the author and was told orally that 55.7 percent of those who did not drop out had
settled at least one debt. That means that 44.3 percent of those still in the program
had not settled any debts at all. And of the total of 4,500 customers in the study,
only 22 percent had settled even one debt.
The 40 percent remaining in the program at the time of the study had been in
it for at least 12 months; some had been in for 18 months and some for 24. It is
possible that more of these customers may eventually settle at least one debt, and
that those who have already settled at least one debt may settle more. It is also
possible that more customers may drop out without settling any debts.
Since there are no statistics based on customers actually completing the program,
which supposedly takes 36 to 48 months, the study does not answer the fundamental question that the FTC has long positedwhat is the number or percentage
of consumers who pay for debt relief services and fully achieve the promised results
of the elimination of debt?
Furthermore, the fact that the rate of offers was higher than the rate of settlements (for those who had settled at least one debt) shows that not all offers are
acceptable. Some offers may be for more money than the consumers can afford, and
some may be rejected because they are not as good as consumers were led to expect.
At any rate, the percentage of offers made, which is highlighted in the report to
demonstrate the value of this companys services, cannot be used as a real measure
for success.
The author of that study argues that prohibiting any fees until debt relief services
have actually been provided is analogous to forbidding insurance companies from
collecting premiums until a claim is filed. But when consumers buy insurance they
receive a legally binding commitment that the company will pay in the event of specific future events. For-profit debt relief services cannot make similar promises of
specific results, even if they attempt in good faith to help consumers. First, creditors
are under no obligation to agree to settle debts, reduce interest or enter into payment plans. Indeed, as some creditors say they choose not to deal with for-profit
debt relief services at all.52 Second, these services have no control over whether
their customers will be willing or able to accept and fund any offers that creditors
may make.
Nonprofit credit counseling services have ongoing relationships with creditors and
understand what their payment requirements are. They determine in advance if
consumers can afford acceptable payment plans and, if not, provide advice about
other alternatives such as bankruptcy. There may be a modest consultation fee or
set-up fee, but the charges for administering debt management programs are usually assessed on a pay as you go basis for the services provided. From the information available about for-profit debt relief services, it appears that they charge significant fees early on in the programs without any reasonable assurance that they
can help consumers and without providing real educational or other services. There
is no reliable, credible evidence that even a majority of their customers get the relief
they have paid for.
The advance fee ban must not be weakened by preconditioning its application on
guaranteeing or representing a high likelihood of success.
The FTCs questions ask whether there is another formulation of the advance fee
ban that would be more appropriate than a ban conditioned on the provision of the
promised goods or services. The answer is no.
Limiting the ban only to instances of a guarantee or representation of a high likelihood of success has been made would create numerous opportunities for evasion.
First, an impression or expectation of future success could be created by the lead
generator, rather than the representations of the direct seller or telemarketer. Once
an impression of likely success has been created, it could be very hard to dispel.
Furthermore, and most fundamentally, the very reason that a consumer would use
a debt relief service is to get their debt problems resolved. A rational consumer
52 See comments made at the FTCs September 2008 public workshop on debt settlement by
American Express (Flores), Tr. 14243, and the ABA (ONeill), Tr. at 9697; see also comments
by Bank of America in Look Out for that Lifeline, Debt-Settlement Firms are Doing a Booming
Businessand Drawing the Attention of Prosecutors and Regulators, BusinessWeek, March 6,
2008.
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would not sign up without the expectation of a high likelihood that he or she would
get satisfactory results.
In essence, the expectation of a high likelihood of success is inherent in the customers acceptance of a debt relief service. A representation of success should not
have to be shown as a separate requirement for application of an advance fee ban.
Such a limitation would very significantly undercut the value of a ban. In fact, we
believe that representations of success should not be allowed at all, for reasons that
we will explain later.
The FTC also asks whether there are alternatives to an advance fee ban that
would sufficiently address the problem of low success rates in the debt settlement
industry. There are not.
A small initial fee may be acceptable in limited circumstances.
Some claim that for-profit debt relief services are entitled to front-loaded fees because of they provide assistance to the customer or provide value at the onset. This
is not supported by the facts. There is no evidence that these companies provide
meaningful consumer education, and even if they did, that would not justify charging hundreds, let alone thousands of dollars. Until satisfactory outcomes for customers are actually accomplishedsetting up a debt management plan, settling the
debts, or negotiating changes to the debtsthe basic service that is promised is not
rendered even if some minor preliminary steps to provide a possible future agreement have been taken. The concerns expressed by some companies about how to get
customers to pay their fees are somewhat ironichow can they represent with confidence that customers will be able to pay off their debts through their programs
when they are not confident that the customers will have sufficient funds to pay
them? At any rate, those concerns are outweighed by the concerns about substantial
injury to consumers when they pay in advance for debt relief services that may
never be provided.
A small initial fee could be reasonable when a debt relief service performs substantial work at the onset such as conducting a real, individualized financial analysis to determine if the program is suitable for and will result in a tangible net benefit to that consumer. Such a fee should be capped at $50, to avoid reintroducing
the market incentive to sign up people who are unlikely to benefit from the service.
Several states have enacted laws that limit the set-up fee that debt settlement services can charge to $50 or less.53 Set-up or enrollment fees for debt counseling services are also limited in some states; for instance, Arizona caps them at $39.54
Adequate proof of results must be provided before fees may be requested or paid.
It is essential that consumers be provided with adequate documentation that their
debts have been renegotiated, settled, reduced, or otherwise altered before payment
can be requested or received. The FTCs proposal describes the types of documentation that would be acceptable but does not specify the form in which it should be
provided. This portion of the proposed rule should be clarified to specify that the
documentation be provided to the consumer in writing and be from and binding on
the creditor.
Furthermore, for debt settlements, it is extremely important that the documentation show that debt has been fully settled for a specific dollar amount. A fully executed debt settlement agreement is the preferred document. Other documents
should be considered only if they are equally binding. This is particularly important
in order to avoid any confusion about what can trigger an allowable feeactual settlements, not unaccepted offers to settle, and not preliminary conversations between
a debt settlement service and a creditor.
Finally, we are concerned that debt relief services may assert that they should
be able to charge fees if they have obtained offers from consumers creditors, even
if the consumers do not accept them. As the ACCC study of one debt settlement
company illustrated, not all offers are accepted. Allowing fees to be collected based
on offers could provide incentives to negotiate offers that do not reduce or alter the
debt in any significant way and that do not benefit consumers. We do not believe
that this is what the FTC intended and the amendment should make clear that the
fee payments are contingent upon, and payable no earlier than, on consumers having accepted binding settlement offers made by creditors.
Fees should not be disproportionate to the results achieved.
The proposed ban on advance fees for debt relief services would mean that fee
payments could no longer be disproportionate to the results that are actually
achieved in terms of the elimination of the debts. For instance, if a consumer asked
a debt settlement company for help with three debts, a fee would be paid for each
53 Florida,
Oregon, Iowa, North Carolina, and Kansas.

Consumer Law Center, Fair Debt Collection, section 12.3, 6th edition 2008 and
54 National
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debt as it is settled; the consumer could not be asked to pay a fee based on the total
amount of all three debts when only one has been settled and the other two are
still outstanding.
In the case of debt management plans, payments to creditors are not made in a
lump sum but are spread out in monthly installments. If we understand the FTCs
intentions correctly, under the proposed amendment the debt management company
would take a portion of the fee each month when it makes the payments to the consumers creditors. However, the language in the proposed amendment does not
make this clear. We are concerned that consumers could be required to pay the entire amount or a significant portion of their fees at the time that they are enrolled
in a debt management plan, giving them no protection if the service stopped forwarding their payments to their creditors.
To address this and other issues we have raised, we suggest that proposed 310.4
(5) be revised to read:
Requesting or receiving payment of any fee or consideration from a person for
any debt relief service until the customer has agreed to the creditors offer and
the seller has provided the customer with written documentation in the form
of a settlement agreement, debt management plan, or other such valid contractual agreement, from and binding on the creditor, that the particular debt has,
in fact, been renegotiated, settled, reduced, or otherwise altered and that shows
the specific dollar amount, interest rate, or other terms as applicable, and in the
case of debt settlement, that shows that the debt has been settled and released.
With respect to a debt management plan that calls for making payments over
time to a creditor, no fee may be received earlier than the proportional amount
of progress made toward reducing the debt.
The advance fee ban as structured will not prohibit consumers from using legitimate escrow services.
We agree that the ban on advance fees will not prohibit consumers from using
legitimate escrow services that they control in order to save money in anticipation
of a settlement, including money that may eventually be used to pay a debt service
provider. However, it is crucial that no fees can be deducted by or on behalf of the
debt relief company until the services have been provided and consumer has been
given the required documentation. We are concerned about business models in
which the consumers open accounts with third-party services and give the debt settlement services a power of attorney to remove the fees from those accounts. This
arrangement is described in some detail in a California case involving Nationwide
Asset Services.55
Any escrow arrangement must give the consumer, and only the consumer, the
right to withdraw the funds at any time. Furthermore, the consumer should be able
to choose the escrow service and not be obliged to use one that assesses higher fees
than other bank accounts of the same type.56
2. Other abusive practices should be prohibited.
In addition to banning fees in advance of actually providing debt relief services,
there are other abusive practices that should be addressed by the TSR in order to
provide adequate protection for consumers.
Changing the addresses on consumers accounts so that the debt relief company receives the bills and notices, not the consumer, should be prohibited.
This prevents consumers from receiving notices about penalties, referral to collection, and other impending actionsinformation consumers need in order to protect
their interests pending any reduction, settlement or other negotiated resolution of
the debt.
Instructing or advising consumers to have no further contact with their creditors
should be prohibited.
This prevents consumers from responding to notices and offers for direct negotiations from their creditors and could worsen their situations by prolonging their debt
problems and increasing the fees that they must pay to the debt relief services and
the likelihood of lawsuits and other adverse actions. It may also prevent the con55 California Department of Corporations vs. Nationwide Asset Services, Inc., No. 38300, 4
5, August 4, 2006, http://www.corp.ca.gov/OLP/pdf/oah/N2005120755.pdf.
56 Taking a power of attorney over any bank account held in the name of the consumer or
held by any third-party should be determined to be an unfair business practice. It is inherently
deceptive to encourage the consumer to open a bank account and then take the right to remove
funds directly out of that bank account by a power of attorney. If the consumer wishes to authorize an electronic debit from his or her bank account, the Federal Electronic Fund Transfer
Act provides the framework for that transaction, including a right to cancel an authorization
for preauthorized periodic payments.
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sumer from receiving information about how high the debt has grown during the
delay for debt settlement/negotiations.
Instructing or advising consumers not to make any payments to their creditors directly should be prohibited.
This prevents consumers from making even minimum payments to their creditors
in order to forestall or reduce the risk of penalties, damage to their credit reports,
lawsuits, and other adverse actions while they are waiting for the debt relief services to be rendered.
Making any representations about the percentage or dollar amount by which debts
or interest rates may be reduced should be prohibited.
This is inherently misleading because each persons debts and capacity to pay
them is different. Furthermore, there are varying levels of cooperation among creditors; some will not even deal with for-profit debt relief services at all. Even if a debt
relief service has a high rate of success overall, the success rate does not guaranty
that every customer will achieve the same results. Moreover, fine-print disclaimers
do little to dampen the expectations created by such claims.
Representations of results are also misleading when they are not regularly
achieved for all of the debts for a significant majority of the customers. For example,
suppose that a debt settlement company regularly settles half of the debts for half
of the initial debt amountan assumption which we believe is very optimistic in
light of high drop out rates. If half of the debts are settled, that means that the
debt settlement companys customers still owe the full amount, plus new creditor
interest charges, on the remaining unsettled half of their debts. It would be very
misleading to claim: We settle debts for 50 cents on the dollar, in this circumstance. A consumer who had started debt settlement with two debts of $12,000
each and had one debt settled for $6,000 would have paid the $6,000 settlement and
still owe $12,000that consumer would be on the hook for 75 cents on the dollar
in remaining debt and the payment for the settlement, not even counting the
amount of the debt settlement companys fees.
We believe that a prohibition against making any representations about the percentage or dollar amount by which debts or interest rates may be reduced is the
best way to protect consumers from expectations that may not be fulfilled. If this
recommendation is not adopted, we suggest as an alternative a ban on making any
representation about the percentage or dollar amount at which a debt may be reduced or the amount a consumer may save unless the provider maintains evidence
that the represented result was achieved for all debt enrolled in the program for at
least 80 percent of the clients who began the service in the most recent two calendar
years. Evidence supporting claims of results should be verified by an independent
audit.
However, if any representations about the percentage or dollar amount by which
debts or interest rates may be reduced are allowed, there should also be a required
disclosure that those results cannot be guaranteed for each individual customer.
Furthermore, debt relief companies should be required to submit their audits to the
FTC so that the information is publicly available.
Failing to provide a money-back cancelation period of at least 90 days in the contract, plus more time if there has been a material breach of the contract or a material
violation of law should be prohibited.
A cancelation period gives consumers time to assess whether a product or service
is right for them. In the case of debt relief services, a minimum of 90 days to cancel
with return of all monies paid except for payments that have already been made
to creditors would enable consumers to make that assessment and provide a disincentive for debt relief services to market to and contract with consumers who are
not likely to benefit from the services.
We also suggest that consumers should have the right to cancel in the event of
a material violation of law or breach of contract by the seller. This would protect
consumers from the worst actors and give a competitive advantage to sellers who
honor the law and comply with their contractual promises.
3. Inbound calls for debt relief services must be covered by the rule.
We strongly support the extension of the existing telemarketing sales rules disclosure and misrepresentation provisions to inbound calls to debt relief services. Limiting the coverage only to outbound calls would ignore the marketing realities and
allow a very large loophole in the TSR to continue. For-profit debt counseling, debt
settlement, and debt negotiation services are commonly advertised on the Internet,
on television, and by other means which are designed to induce the consumer to
make an inbound call. Protecting the consumer from misrepresentation and requiring disclosure of key information only for those potential debt relief customers who
receive a phone call, rather than also for those who are induced by an advertisement
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to make a phone call, would make no policy sense, leave a large loophole in place,
encourage evasion of the rules, and give a competitive advantage to those who use
advertising to induce inbound calls.
An additional reason that inbound calls must be covered is the role of lead generators. For example, National Consumer Council used pre-recorded messages left on
consumers answering machines as well as direct mail to induce consumers to call
in order to generate leads for several other companies. Both the representations
used to induce calls from consumers and those made during the calls should be covered. The TSR should make clear that it applies to lead generators. Furthermore,
we believe that the debt relief providers who accept those leads to should be held
responsible for the representations made to generate them, including those made
during inbound calls.
4. We support the disclosures required in the proposed amendments.
Consumers must be told the truth about the debt relief services. It is very important that the current general disclosure requirements under the TSR apply to inbound calls for debt services as well as outbound calls, as the FTC has proposed.
We also agree that the additional disclosures pertaining to debt relief services are
needed. They will help consumers understand exactly how these services work, what
to expect from them, and whether they are likely to serve their needs. Combined
with the advance fee ban, the disclosures would provide strong consumer protection.
The disclosures will also help consumers understand their own obligations and the
impact that the services may have on them. For example, it is crucial for consumers
to know that contracting with a debt relief service will not necessarily prevent their
creditors from taking collection action, that their credit ratings may be affected, and
that the savings they may realize may be considered taxable income, and that the
debt balance increases when payments are not being made.
We understand that payments for debt relief services are often debited from consumers bank accounts within a few days after they have enrolled in the programs.
However, if the disclosures are designed to help consumers make informed decisions
about whether to sign up or not, they need the information before making the contractual commitment even if the payment will be later. Therefore, we suggest that
310.3 (a)(1) could be improved to provide greater protection to consumers, not just
for debt relief services but in other types of telemarketing sales as well, if it required the disclosures to be made before the earlier of payment or an obligation to
pay. The revised subsection would read:
Before the earlier of payment or an obligation to pay for goods or services offered,
and before any services are rendered, failing to disclose truthfully, in a clear and
conspicuous manner, the following material information:
5. Prohibitions against specific misrepresentations are useful.
We agree with the FTC that it is useful to add a specific prohibition in 310.3
(a)(2)(x) against misrepresenting any material aspect of a debt relief service, such
as the amount of money or percentage of debt that consumers must accumulate before negotiations with their creditors are initiated, the effect of the service on collection efforts, how many consumers attain certain results, and whether the service is
nonprofit. This provides greater clarity to debt relief service providers about what
they can and cannot do.
6. The exemption for transactions that are not concluded until after a face-to-face
sales presentation should not apply to debt relief services.
We believe that the exemption under 310.6 (a)(3) should not apply to debt relief
services. Even if the exemption may have made sense for certain types of telemarketing sales, in the sale of services to be delivered in the future such as debt
relief, the fact of a face-to-face meeting simply does not create a sufficient safeguard.
It would be far too easy for the real sales process to occur by phone or other remote
means and then a simple signing meeting to be used to escape all application of the
rule.
Furthermore, a face-to-face exemption could create the anti-competitive result in
which industry players who deal with potential customers only via the Internet or
phone must adhere to standards of disclosure, non-misrepresentation, and the very
important advance fee restriction, while those who arrange for a face-to-face meeting do not.
Conclusion
The police the marketplace approach taken by the FTC will protect not only consumers but any legitimate debt relief services that actually provide real benefits to
consumers. Those debt relief services will be entitled to fees, and should have a bet-
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ter chance of succeeding in the marketplace when their competitors are stopped
from taking significant fees without achieving real debt relief.
We agree with the FTC that additional measures must be taken to address Americas debt problem, including continued enforcement, consumer education, and more
flexibility in the options that creditors provide to consumers. There should also be
obligations for debt relief services that may go beyond the scope of the TSR. For
example, debt relief providers should be required to conduct an individual financial
analysis for all potential customers to determine whether the service is suitable for
and will provide a tangible net benefit to them before enrolling them.
Furthermore, there should be similar rules to protect debt relief customers when
the use of the telephone is not involved in the transaction, such as when they are
solicited for and enroll in debt relief services entirely through the Internet.
The FTC has not included mortgage foreclosure rescue and modification services
in the proposed amendments to the TSR because it has received authority from Congress to promulgate separate rules in that regard. However, the issues are very
much the same and the FTC should address them with equally strong rules.
We believe that the proposed amendments to the TSR are a good and necessary
step to protect debt relief customers from false promises and financial injury. We
appreciate the opportunity to provide our comments and will be happy to answer
any questions that the FTC may have in regard to our views and suggestions.
Submitted by:
SUSAN GRANT,
Director of Consumer Protection,
Consumer Federation of America.
On behalf of:
Consumer Federation of America
Consumers Union
Consumer Action
The National Consumer Law Center on behalf of its low income clients
The Center for Responsible Lending
The National Association of Consumer Advocates
The National Consumers League
U.S. PIRG
The Privacy Rights Clearinghouse
The Arizona Consumers Council
The Chicago Consumer Coalition
The Consumer Assistance Council
The Community Reinvestment Association of North Carolina
The Consumer Federation of the Southeast
Grassroots Organizing
Jacksonville Area Legal Aid, Inc.
The Maryland Consumer Rights Coalition
Mid-Minnesota Legal Assistance
The Virginia Citizens Consumer Council
ECONOMIC FACTORS
AND THE
DEBT MANAGEMENT INDUSTRY
Richard A. Briesch, Ph.D.Associate Professor, Cox School of BusinessSouthern Methodist University
August 6, 2009
Executive Summary
The current economic climate makes the need for debt management programs
even more acute. More consumers are finding themselves in financial hardship due
to high unemployment, low home equity rates, lack of access to bankruptcy protection, and the credit crunch so well documented in the press and by legislators.
This economic climate implies that many consumers are one emergency away from
financial hardship. There is no question that the multitude of people currently in
financial distress need programs that reduce the principal of their debt to stave off
bankruptcy (Manning 2009, Plunkett 2009).
Debt management programs (DMPs) come in several forms, but their basic structure is similar: they require some sort of consumer education if they are accredited
by national trade associations (Keating 2008, USOBA 2008), consumer participation
is voluntary (Hunt 2005, Plunkett 2009) and a plan is set up to make the consumer
debt-free in two to 5 years. The key differences in the organizations are the mechanisms they use to finance the organization and to help consumers pay off their debt
(Hunt 2005, Plunkett 2009). In this paper, I refer to organizations that help con-
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sumers pay off their debt by reducing interest rates as consumer credit counseling
services (CCCSs) and organizations that help consumers pay off their debt by reducing principal as Debt Settlement Programs (DSPs). The efficacy of these different
approaches has been discussed by a variety of authors, but these discussions have
lacked a clear and detailed consumer welfare analysis, which is provided in this research.
One of the most important findings of this research is that the different approaches (CCCS or DSP) help consumers by increasing their economic welfare as
compared to paying off the debt under the original conditions. However, the consumer welfare analysis suggests that DSPs create the greatest consumer welfare of
any approach. In fact, consumer welfare is higher under DSPs than under the 6060 rule (repay 60 percent of the debt principal in 60 months) suggested in the literature (see e.g., Keating 2008, Manning 2009). If consumers are allowed to repay
their debt over 3 years, the affordability of the DSPs (as measured by monthly payments) is similar to the affordability of a program based upon the 60-60 rule. Additionally, creditors are helped by both CCCSs and DSPs as their losses are lower
when consumers use DMPs as opposed to other alternatives.
This research empirically examines the efficacy of one DSP company in this industry. Key findings, which are consistent with the observation that programs which
reduce the principal of the debt may be the only means to keep a growing number
of consumers out of bankruptcy, include:
1. Accurate measures of consumer completion and cancellation cannot be calculated from the data, as almost 30 percent of the cancellations are due to the
consumers either directly paying off the debt or being forced into bankruptcy.
Further, the cancellation data does not contain information regarding offers received or debt repaid, so it does not accurately reflect value generated by the
company. That said, the raw cancellation rate (60 percent over 2 years) is much
less than speculated (85 percent within 1 year) and is similar to or better than
other subscription-based service industries (e.g., mobile telephone and cable television companies) that have Better Business Bureau certified members.
2. Conditional on the consumer receiving an offer or settlement, the firm had
mean, median and mode settlement offers at or below 50 percent of the original
debt. This number beats the 60-60 rule and suggests that the firm is generating
significant consumer benefits.
3. The debt settlement company generates tremendous value to its clients, as
more than 57 percent of the clients have offers to settle at least 70 percent of
their original debt, and the most common situation (almost 30 percent of the
clients) having settlement offers for at least 90 percent of their original debt.
4. The debt settlement company has an increasingly higher value to customers
with higher account balances and higher total debt, but lower number of accounts.
5. Once fair share payments are taken into account, CCCS fees and payments
for a consumer account can exceed 29 percent of the consumer debt, levels
which Plunkett (2009) calls exorbitant. This finding suggests that regulation
is required to ensure transparent reporting of all fees and payments is required
for all companies offering Debt Management Programs.
6. Reasonable upfront fees by DSPs (before settlement) should be allowed because DSPs generate value for consumers and incur expenses generating this
value. This fee structure is similar in nature to the one used by CCCSs, attorneys and other service-providing firms.
These findings suggest that a common sense approach should be used with the
DMP industry. A common sense approach implies that regulatory and other consumer advocacy groups focus on ensuring that there is sufficient regulation to be
able to identify and, if necessary, prosecute bad actors without harming economic
competition which increases consumer welfare. The industry analysis also suggests
several regulatory recommendations which could further benefit consumers:
1. Focus on making alternatives transparent so consumers can make better decisions: disclose total fees including fair share and all other consumer fees,
success metrics of offers received, settlements accepted and percent of debt settled. This disclosure has the additional benefit of allowing interested third parties, e.g., consumer advocacy groups and government agencies, to calculate the
economic impact of this industry on consumers and other industries.
2. Provide guidance for handling of client monies in fiduciary accounts, especially in terms of timing between audits, what happens if a consumer cancels
service, appropriate interest rates, and whether or not (and under what cir-
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cumstances) companies can make payments on behalf of consumers. The regulators should allow DSPs to establish trust accounts with their clients, which
would include:
a. Requiring consumers to save money every month as one condition of
making satisfactory progress in the program. DSPs should have the ability to monitor, but not control (or make disbursements from) these funds.
b. Proving regulatory protection for consumers from litigation and creditor
calls while consumers are making satisfactory progress. Other protections
to ensure that consumers are protected from cancellation fees paid to DSPs
and unethical business practices, e.g., ensure that the financial institutions
holding the funds are independent of the DSPs and no fees are disbursed
from the accounts without full disclosure and regulatory oversight and approval.
c. Allowing disbursements from these accounts only with consumer and
DSP approval and for payment to creditors, approved fees, and to the consumer if they cancel the program or for new financial hardships.
3. Require financial education of consumer, and require specific metrics in
terms of meeting short-term and long-term education and outcomes (see, e.g.,
Clancy and Carroll 2007, Keating 2008, Staten and Barron 2006).
Introduction
While the current economic climate (discussed below) provides strong support for
programs which help consumers get out of debt, the strongest arguments for programs which take the approach of reducing the principal comes from organizations
and individuals who are either antagonistic or agnostic to this approach. For instance, the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (or
BAPCPA) suggests a 60-60 standard for debt repayment outside of bankruptcy,
where the 60-60 refers to the consumer entering into an agreement with their creditors 60 days prior to bankruptcy to repay 60 percent of their debt within a reasonable timeframe. Additionally, both Plunkett (2009) and Keating (2008), who use
pretty strong rhetoric in denouncing companies using this approach, support a 6060 rule that allows consumers to repay 60 percent of their debt within 60 months
and acknowledge that a growing number of consumers may be forced into bankruptcy without access to ethical and proconsumer companies offering this alternative. For the remainder of this document, the term 60-60 rule refers to repaying
60 percent of the debt within 60 months, not the BAPCPA plans.
Within the debt management industry, firms have taken two different approaches
in their debt management programs (DMPs). The first approach, called Consumer
Credit Counseling Services (or CCCSs), helps consumers by reducing the interest
payments and, potentially, fees on the debt, but still has consumers pay 100 percent
of the principal. The second approach, called Debt Settlement Programs (or DSPs),
helps consumers by reducing the principal on the debt (Hunt 2005, Plunkett 2009).
These approaches also differ in how the firms are funded and their taxable status.
CCCSs are generally nonprofit firms and are funded by both account maintenance
fees from consumers as well as donations from creditors which may take the form
of fair share payments and/or direct grants (Boas et al., 2003, Plunkett 2009).
DSPs, on the other hand, are generally for-profit firms, and are funded through fees
charged directly to consumers without any payments from the creditors (Hunt
2005).
Before proceeding further, I acknowledge that both types of organizations have
had firms which have taken advantage of vulnerable consumers (US Senate Hearings 2005, Clancy and Carroll 2007, Plunkett 2009), so some of the heated rhetoric
directed at different approaches by organizations with vested interests is not only
self-serving, but is also counterproductive. The focus of legislative efforts should be
to protect consumer welfare by ensuring that the goals of the industry (consumer
education and debt relief) are met, to ensure that organizations act in ethical and
transparent ways and to impose appropriate sanctions on any company that willfully take advantage of consumers, i.e., bad actors.
One of the reasons that I argue that the heated rhetoric and trying to use regulation to eliminate other approaches are counterproductive is based on the notion that
competition produces efficiencies, which, in turn, increase consumer welfare and economic growth. A fundamental principal of the Federal Trade Commission is that
competition benefits consumers through lower prices and increased variety. This
philosophy is summarized as:
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Competition in America is about price, selection and service. It benefits consumers by keeping prices low and the quality and choice of goods and services
high (FTC 2009a).
Therefore, rather than take the position of being an advocate for a specific approach to helping consumers to get out of their situation, this research is focused
on understanding the different approaches and calculating the consumer benefits associated with each approach. The benefits are measured in terms of both total consumer welfare (i.e., how much will consumers pay in total for different approaches)
consumer affordability (how much must the consumer pay each month), and how
much are firms collecting as a percentage of the original debt from the consumers
and creditors. It is important to include payments from creditors to the firms, as
they represent indirect fees charged to consumers because the creditors should be
indifferent between giving consumers a discount of the same amount that they pay
the firms in fair share payments or any other way the firm is compensated.
Probably the most important finding of this research is that both CCCSs and
DSPs increase consumer welfare over the alternative of the consumer paying off
their debt using a fixed payment of 2 percent of their original debt every month (the
recommended minimum payment). However, DSPs increase consumer welfare much
more than CCCSs and have similar affordability to CCCSs when the payments can
be made over 3 years (instead of 5 years for CCCSs). Given the findings in the extant literature that creditors are also better off when consumers use DMPs, it appears that DMPs are a win-win for both consumers and creditors, so regulators
should be encouraged to use a common sense approach to this industry: protect the
vulnerable consumers while supporting competition among the different approaches
to getting rid of consumer debt. This competition is consistent with the Federal
Trade Commissions approach to other industries and would result in increased consumer welfare over the long term.
Some of the key recommendations for regulatory agencies include: (1) protecting
consumers from litigation and calls/threats from creditors while they are making
satisfactory progress in accredited DMPs. Satisfactory progress needs to have
measurements related to educational goals as well as financial goals (i.e., being current on payments for CCCSs and saving enough for DSPs); (2) providing DSPs with
the ability to set up trust accounts for their clients that have very specific limitations on disbursements (i.e., approved payments to creditors, approved fees to DSPs,
payments to consumers for cancellation or new hardships, etc.); (3) require full disclosure of all fees consumers directly or indirectly (e.g., fair share payments,
grants from creditors, etc.) pay; and (4) provide guidance of how companies can accurately measure program effectiveness, e.g., does receiving offers for all enrolled
debt constitute program completion?
The remainder of this document is organized as follows. In the next section, the
economic factors which are increasing the necessity of this industry are briefly reviewed. Next, the different alternatives are provided with an eye toward understanding the economics and limitations of the alternatives. In section three, the performance of a specific DSP is analyzed. This firm provided a significant dataset, the
details of 4,500 randomly selected clients. In analyzing the clients, we use a stratified sampling approach, also called a strata approach. The clients are combined
into different groups, based upon their debt levels. These different stratums are
then analyzed to see if consumer behavior or firm performance differs between the
groups. As far as we know, this type of analysis of the efficacy of Debt Settlement
Programs has not been published.
In the next section, the economics (both for consumers and the firms) of the debt
management programs is analyzed in more detail. Specifically, consumer welfare is
estimated and compared under a variety of assumptions. This paper concludes with
public policy and industry recommendations.
Current Economic Climate
The importance of the consumer debt management industry has become increasingly important as the U.S. economic recession continues. Table 1 shows the seasonally adjusted unemployment rate in the United States, which has reached 9.4 percent as of May 2009.
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Table 1U.S. Unemployment Rate
Year
Month
Percent
2008
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
5.5
5.6
5.8
6.2
6.2
6.6
6.8
7.2
7.6
8.1
8.5
8.9
9.4
2009
Source: U.S. Bureau of Labor Statistics (http://www.bls.gov/opub/ted/).
Even worse, the long-term unemployment rate (those unemployed more than 27
weeks), rose in May by 268,000 to 3.9 million U.S. Households, roughly triple the
number at the start of the recession (U.S. Bureau of Labor Statistics 2009). Note
that employment is generally a lagging indicator (e.g., it improves after the economy
improves), an uptick in the U.S. economy will not provide immediate relief for these
households.
The high unemployment rate coupled with the fact that the average credit card
balance at the end of 2008 was more than $10,000 for approximately 91 million
households (158 million individuals or 78 percent of all households) who have credit
cards (Woolsey and Schulz 2009). A silver lining is that in April of 2009, seasonally
adjusted total consumer debt was decreasing at a 7.5 percent annual rate (Federal
Reserve 2009). However, household leverage (total debt to disposable income), while
decreasing, still remains at 130 percent from a high of 133 percent in 2007. This
number can be contrasted to the 55 percent leverage in the 1960s and 65 percent
leverage in 1980s (Zuckerman and Todd 2009).
An implication of these statistics is that many consumers are barely able to pay
their debts and are one emergency away from financial hardshipa recent study
found that medical bills were a contributing factor in more than 60 percent of all
bankruptcy filings (Himmelstein et al., 2007). From this hypothesis, one would then
expect consumer credit card and personal loan default rates to be increasing. Figure
1 confirms this belief, as consumer default rates on credit cards stands at 7.49 percent in the first quarter of 2009, and consumer defaults on personal loans stand at
2.93 percent in the same period. If anything, these numbers understate the problems consumers are having. In a report prepared for the National Foundation for
Credit Counseling, Harris Interactive (2009) found:
26 percent of households admitted to not paying their bills on time. Minorities
may be more severely impacted, with this number rising to 51 percent for African American households.
In the last 12 months, 15 percent of individuals were late paying a credit card
and 8 percent admitted to missing at least one payment, and 6 percent have
their debts in collection.
32 percent admit that they have no savings, and only 23 percent state that they
were saving more than a year ago.
57 percent of households do not have a budget, and 41 percent give themselves
a grade of C, D, or F in their financial knowledge.
One may conclude that given the financial turmoil in this market, credit card
companies may be hurt as well. However, a recent study found that since the bankruptcy law was reformed in October 2005 (2005 Bankruptcy Abuse Prevention and
Consumer Protection Act or BAPCPA), the credit card industry has recorded record
profits, although more factors (e.g., interest rate spreads, increased fees, etc.) enter
into this profitability than simply the increased difficulty of entering into bankruptcy (Simkovic 2009).
A recent study estimated that as many as 800,000 households have been precluded from entering bankruptcy due to BAPCPA (Lawless et al., 2008). Therefore,
the need for a service which helps consumers manage and pay down their debts and
to work with the credit card companies is more acute than ever. In fact, recent legislation requires credit card companies to recommend credit counseling education and
debt management programs to consumers in financial trouble (Reddy 2009). So what
are consumers alternatives when they find themselves in financial hardship? Their
alternatives are grouped into four broad categories (Hunt 2005) that vary in terms
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of a continuum of how much of the debt can the consumers afford to repay (all, partial or nothing):
1. Bankruptcyeither chapter 7 or chapter 13.
2. Debt Management ProgramsThis includes any service which tries to help
the consumers pay off their debts (outside of bankruptcy) either through reduction in interest rates, debt reduction or other means.
3. Other financingThis includes raising money through sales or refinancing of
current assets (e.g., home equity loan).
4. Repayments on original terms.
Figure 1Bank Charge Off Percentages
Source: U.S. Federal Reserve Bank.
Overview of Consumer Alternatives

This section provides an overview of the different alternatives that are available
to consumers who are in financial hardship. Before discussing the alternatives, a
brief discussion of the process or stages involved is provided (based on Mojica 2009).*
1. Financial Hardship
First, consumers have some financial hardship which limits a familys ability to
continue paying their debts. For instance, Himmelstein et al. (2007) found that medical bills were a contributing factor in more than 60 percent of all bankruptcy filings
and that medical portion of the debt was more than $5,000 or 10 percent of family
income. A creditors willingness to work with a consumer, e.g., give grace periods,
reduce interest rates and/or debts, is directly linked to the consumers ability to
demonstrate that a true hardship was the cause of the households financial crisis
(Dash 2009).
2. 30 Days
Once the consumer is at least 30 days late in payment, and for every 30 days
thereafter, a notice is sent to credit bureaus indicating delinquency. At this point
the consumer usually starts receiving calls from the creditors requesting payment.
Eventually, credit cards and other revolving credit are canceled for the consumer.
Once the account is delinquent, credit card fees may be dramatically increased, although new Federal legislation has put curbs on credit card companies in terms of
fees and interest rate changes (Reddy 2009). Reddy did cite a consumer whose interest rate jumped from 12 percent to 24 percent due to late payments even though
the credit card company did agree to work with the consumer.
In the current economic crisis, credit cards are willing to extend the grace periods
for consumers who have true hardships, even reducing the total debt amount. How-
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* Sources: Bank of America 2008 10K; page 127Table 15, page 128Table 16, page 172
Table 37; American Express 10K; page 50, page 56; Chase 2008 10K; page 155, page 81, page
128; CapitalOne 2008 10K; page 73Table C, page 76Table F.
127
ever, these deals come at a pricea consumers credit score may drop 70 to 130
points as a result (Dash 2009).
3. Six Months
The creditor writes off the debt. At this point, the account may be sold, sent to
a collections agency or a law firm. Generally, the amount of debt collected by these
agencies varies, but examination of 10K reports from various creditors indicates
that credit card companies are receiving about 10 percent of the outstanding debt
when it is sold.
More recently, credit cards have become more willing to negotiate terms with consumers, but they generally require that consumers be at least 90 days delinquent
and are accepting dimes if not pennies on the dollar (Dash 2009). Given the relatively low recovery rate, it suggests that other alternatives (e.g., lawsuits, selling
debts to collection agencies) provide even lower returns for the creditors.
4. Lawsuit as Option
Creditors may sue consumers to collect bills. From a consumer standpoint, this
option adds legal fees to the debt they already cannot afford. Assuming that the
creditor gets a judgment, it may be enforced by garnishing wages, sales of assets,
etc.
From a consumer standpoint, there is a mine field waiting for them once they get
into financial trouble. Generally, the creditors will not work with a consumer until
they are at least 90 days delinquent, and they may increase interest rates or fees
simply because the consumer contacts the creditor for help (Dash 2009). Further,
creditors are more likely to help consumers who do not have a history of financial
troubles, so they are less likely to help those most in need (Dash 2009). Under a
practice known a global default, creditors can move an account that is current into
default because the consumer is delinquent to a different creditor, (see, e.g., testimony U.S. Committee on Financial Services 2007). Once the credit card is in default, legislation limiting harassing calls really does not apply to the original creditors, only third party collectors. One would expect very high dropout or cancellation
rates for the first 6 months a consumer is enrolled in a program, until the regulatory protections take effect. Therefore, some sort of protection for consumers who
want to settle their debt and have enrolled in certified debt management programs
is required. Ironically, studies have found that credit card losses are 32 percent
lower for the clients who enter DMPs before fair share payments are included (Hunt
2005), so it is against the creditors own best interests to force the consumer into
litigation. England has solved this problem for their consumers in financial difficulty
using the insolvency act of 1986. In this act, if enough creditors (generally 75 percent) agree to the debt reduction plan, the other creditors are legally bound by the
repayment plan even if they did not agree to the plan.
Bankruptcy*
Both Chapter 7 and Chapter 13 bankruptcy are legal means of settling debts.
Chapter 7 is a liquidation of assets, and the reform act of 2005 (2005 Bankruptcy
Abuse Prevention and Consumer Protection Act or BAPCPA) placed many hurdles
for consumers to use Chapter 7 (and instead force them to use Chapter 13). These
hurdles includes means testing, higher fees and increased costs and risks for those
assisting consumers filing Chapter 7 (Simkovic 2009). Once a consumer uses chapter
7, they cannot file again for 8 years and are limited in filing for other legal remedies
for several years. Additionally, the filing stays on their credit report for 10 years
(Hunt 2005). One unfortunate side effect of filing bankruptcy is that many employers check potential employee credit history, so this may have an effect on future income and job prospects.
Chapter 13 filings on the other hand are considered wage earner plans where
the debt amount is reduced based on the consumers ability to pay, and a plan is
set up so that consumers pay their debts in three to 5 years (Hunt 2005). Hunt
(2005) suggests that attorney and trustee fees amount to approximately 14 percent
of the debt, and creditors average about 35 percent recovery of the debt. However,
he also suggests that only 33 percent of consumers finish the program, less than
the average for voluntary debt management programs. In a white paper, the United
States Organization for Bankruptcy Alternatives suggests that the completion rate
is much lower, only 20 percent to 25 percent (USOBA 2008). As with Chapter 7,
* Source: Fair Debt Collections Practices Act (FDCPA) at http://www.ftc.gov/bcp/edu/pubs/
consumer/credit/cre27.pdf.
See
http://www.insolvency.gov.uk/insolvencyprofessionandlegis
lation/legislation/uk/insolvencyact.pdf, for a description of the insolvency act of 1986 which established this system.
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Chapter 13 filings go on a consumers credit report (although for a shorter period
of time), and their ability to file in later years is limited.
Bankruptcy as an alternative for most consumers has become much more limited
since BAPCPA was passed in 2005 (Lawless et al., 2008). They estimate that as
many as 800,000 U.S. households have been prevented from filing bankruptcy in the
last few years.
However, this does not mean that total bankruptcy filings are down, only that
consumers are being moved from Chapter 7 (liquidation) to Chapter 13 (partial payment) to move this option away from paying nothing toward paying something.
When these settlements are sold on the open market, they generally receive only
1821 cents on the dollar (Manning 2009). Given the above estimates that the judgments only return 35 cents on the dollar, the net effect to the creditors is that they
only receive pennies on the dollar through this route. One would expect that creditors would attempt to stay away from this alternative.
However, once there is more than one creditor, they face a classic prisoners dilemma (Poundstone 1992). The basic idea is that even though all of the creditors
are better off by avoiding bankruptcy and legal judgments, each individual creditor
is better off by cheating (e.g., initiating legal judgments to be the first one in line).
This problem has also been called the creditors dilemma (Bainbridge 1986). Therefore, some regulatory guidance is required beyond BAPCPA, which suggests the 6060 (pay off 60 percent of debt in 60 months) as a standard, and would limit creditors
to 80 percent of the debt principal if they do not reach an agreement (Manning
2009). Assuming that they collect on the judgment, this 80 percent rule provides the
wrong incentive to the creditors, as they are better off using litigation. Therefore
this 80 percent standard should be lowered to 60 percent to match the 60-60 rule.
Consumers must also go through counseling services (regardless of whether or not
they enroll in debt management programs) prior to filing for bankruptcy. The National Foundation for Credit Counseling estimated that their members provided 1.26
million education sessions for bankruptcy in 2007 (Keating 2008). Some recent research has suggested that the educational component may be important for consumers (Staten and Barron 2006). Staten and Barron find that consumers who enter
counseling are significantly less likely to file for bankruptcy in later years, and have
significantly lower risk scores than consumers who choose to not enter counseling.
A nagging concern is whether the reason for the good outcomes is self-selection
(e.g., motivation of consumers) or efficacy of the program (Clancy and Carroll 2007;
Hunt 2005). That said, academic arguments over the source of the outcomes of these
programs miss the key point. Regardless of the underlying cause, if consumers are
more successful once they enter the programs, shouldnt those programs be encouraged and protections for consumers who are making satisfactory progress enacted,
so that their chance of finishing the programs and gaining their benefits are enhanced? This is a classical agency problem where the credit card companies (and
public policy) should not care about why clients are more successful, only that they
are more successful once they enter into the educational programs. While it may be
difficult to determine measures of the program outcomes, an approach similar to
that used in Stanten and Barron (2006) where consumers are surveyed years after
exiting the programs to determine financial health through risk scores, credit scores,
bankruptcy rates and other measures would seem to be a good start and should be
required for all organizations offering counseling services.
Refinance
Refinancing the debt using assets is a viable alternative for only a few consumers,
as it requires consumers to receive appropriate interest rates and to have sufficient
equity in their home or other assets to pay down the debt. The second criteria can
be a very high hurdle given that the median household filing bankruptcy has a negative $25,000 net worth (Lawless et al., 2008) and that household home equity is
at historic lowsbelow 50 percentand economists expect this trend to continue
(AP 2008, Keating 2008).
The other problem is that some consumers may have already used this option to
pay off debts or to get needed cash for ongoing expenses, even education (Chu and
Achohido 2008). Given the current crisis in getting loans, declining home values and
variable interest rate mortgages that are getting ready to reset, this option is becoming less viable for most consumers (Manning 2009).
The problem is that the credit cards use risk assessment to set interest rates, implying that consumer interest rates increase once delinquencies are noted on their
credit reports (Chu and Achohido 2008, Plunkett 2009). A clear consequence is that
consumers may not receive good interest rates, even on a home equity loan due to
the credit problems. In addition, by refinancing, a consumer can lose their assets
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(e.g., their homes and cars) if they default on the loan as they have converted unsecured debt into secured debt.
Debt Management Programs
Debt management programs (DMPs) come in several forms, but their basic structure is similar: they require some sort of consumer education if they are accredited
by national trade associations (Keating 2008, USOBA 2008), consumer participation
is voluntary (Hunt 2005, Plunkett 2009) and a plan is set up to make the consumer
debt-free in two to 5 years. The key differences in the organizations are the mechanisms they use to finance the organization (consumer fees vs. fair share payments
from credit card companies) and to pay off consumer debt (reduce interest rates and
fees vs. reduce debt principal) (Hunt 2005, Plunkett 2009). In this paper, I refer to
organizations that reduce interest rates as consumer credit counseling services
(CCCSs) and organizations which reduce principal as Debt Settlement Programs
(DSPs). It should be noted that neither of these organizations can force the creditors
to accept their terms. It is the case that some creditors do not work with DMPs (of
either type) or only make very small concessions (Hunt 2005). Given the national
organizations call for debt principal reduction as part of DMPs, it appears that, over
time, the distinction between these two types of organizations may blur (Keating
2008), making a stronger case for the strong value of DSPs to consumers.
The importance of full disclosure of the funding sources cannot be overstated. Because the CCCSs receive some of their funding from the creditors (Keating (2008)
estimates that about 50 percent of the funding for CCCSs come from creditors),
there is a conflict of interest for these organizations, especially when the funding
is tied to the amount of debt under management (Boas et al., 2003, Hunt 2005,
Manning 2004). Second, because the CCCSs receive some of their fees indirectly,
there may be an impression that they are less expensive than DSPs. However, the
economic welfare of the creditors is unchanged if they give these fees to consumers
as a reduction in the debt principal instead of to the CCCSs in the form of grants
or fair share payments. Therefore, consumers are paying increased and undisclosed fees in their monthly payments. Further, the FTC recommends consumers
ask about the funding sources as part of their consumer protection program (FTC
2009c). I believe that stronger action should be taken, requiring disclosure of the
fees, as information is the basis of education, and education is the first line of defense against fraud and deception, it can help you make well-informed decisions before you spend your money (FTC 2009b).
Consumer Credit Counseling Services (CCCSs)
CCCSs generally try to get rid of a consumers debt over 5 years and generally
receive the majority of their funding from credit card companies (Boas et al., 2003,
Hunt 2005), although the terms of the agreements have been evolving over time.
Hunt states that the average account set up fee is $25 and monthly maintenance
fee is $15. Over 5 years, this translates into $910 paid directly to the CCCS. Additionally, he notes the firms receive fair share payments (or even grants) from the
credit card companies which average 6 percent of the amount that the credit card
receiveswhich is more than 6 percent of the debt. For instance, assuming equal
payments over 5 years and a 10-percent interest rate, a consumer with $10,000 in
debt will pay $12,748.23 to the credit card company, which implies that the
consolidator would receive another $764.89 in fees (for a total of 16.7 percent of the
debt). The levels of the fees in this example appear to be similar to those in Chapter
13 bankruptcy noted above.
It should be noted that CCCSs collect the money from the consumers and distribute the money to the creditors (Boas et al., 2003), which implies a fiduciary duty
is accepted by these organizations. However, they implicitly assume that consumers
will pay back 100 percent of the debt, only at a reduced interest rate and potential
reduction of some or all of the fees.
Therefore, not only do they not conform to the 60-60 rule noted above, but this
alternative may not be viable for some consumers who could pay back the debt
under the 60-60 rule, forcing them into litigation and/or bankruptcy (Manning
2009).
From a consumer welfare standpoint, the key drivers of consumer welfare are the
terms of the agreement: how much are the interest rates reduced, and how many
payments are required? Plunkett (2009) suggests that these terms vary widely by
creditor and by CCCS, so one area of needed disclosure are median terms negotiated
by the CCCS for each creditor, as well as median consumer fees and fair share
payments and/or grants from creditors. Clearly, the CCCS would need to disclose
to their customers if a creditor did not accept the terms presented and would need
to adjust the required payments.
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In terms of calculating efficacy of the programs, both measures and approaches
for the educational component are discussed above, so I focus on the debt reduction
portion of the business. One set of measurements relate to the terms negotiated
with the creditors. For instance, in the settlement offers and final settlements, how
much is the original debt amount reduced? And how much of the original debt receives settlement offers? A second set of measurements are the successful completion rates of the program, although without some regulatory protection of consumers
enrolled in these programs, these are not accurate measurements of firm performance because consumers can always be forced out of the programs through litigation
by one or more creditors.
Debt Settlement Programs (DSPs)
For DSPs, the general idea is to have the consumers save money and pay the
creditors in one or a few payments (depending upon the size of the debt) with the
goal of paying off the debt in two to 4 years. Instead of focusing on interest rates,
DSPs negotiate to reduce the principal of the debt, which implies one set of metrics
is their ability to meet or beat the 60-60 rule noted above. Details of the size of the
principal reduction are missing in the literature (although they are examined in the
next section for one company), but companies claim to be able to reduce up to 50
percent of the principal. Instead of taking money from the credit card companies,
these organizations generally receive their fees from consumers. Plunkett (2009)
writes that these fees average somewhere between 14 and 20 percent, and Manning
(2004) claims that these fees can include a set up fee ranging from 24 percent, and
service fees range from 1525 percent.
Without defending the veracity of the assumptions, if we take the same consumer
above, who has $10,000 in debt, receives a 20 percent reduction in the debt principal
and pays a lump sum at the end of 2 years? The consumer would end up paying
$8,000 to the Credit Card Company or $4,748 less than they would have under the
CCCS example above. Whether or not the consumer is better off would then depend
upon the fees chargedthe consumer would be indifferent (i.e., pay the same
amount) if the fees were $4,748+$910 or $5,658 (56.6 percent of the original debt).
As with the CCCSs, consumer welfare is strongly influenced by the key assumptions of the model, i.e., number of years before lump-sum payment, interest rate and
the principal reduction amount. This example also shows where some confusion may
enter into marketing and other communications: the consumer received a 20 percent
reduction from the initial debt, but did they still have to pay interest on the debt
while saving for the payment (note the results are the same as making payments
for 2 years). So, a consistent method of communicating the principal reductions is
required, where the amount of the final payment in relation to the initial debt is
reported. Similar to CCCSs, transparency implies that median settlements for different creditors and credit status (e.g., in litigation) would have different principal
reductions and would need to be disclosed.
This model has some unique difficulties as well as common problems with the
CCCSs. A key difference would be that consumers (or clients) are not required to
accept settlement offers from the creditors. Therefore, any metric which attempts
to only look at settlements would tend to underestimate (i.e., bias) the effectiveness
of DSPs, meaning that a second set of metrics related to offers received from creditors would also be required.
A second problem for DSPs is whether or not they should put client money into
fiduciary accounts. In the data provided by the DSP analyzed in the next section,
6.8 percent of the cancellations gave the inability to save as the reason that they
canceled the service. On one hand, one could argue that the consumer must learn
how to handle their savings to really get out of the cycle of debt, so no fiduciary
accounts should be necessary. However, one could use the analogy of learning to
crawl before learning to walk to analyze this situation. The end goal of the program
is to have consumers self-sufficient, but they may need to learn how to save, and
how to not dip into these savings for luxury items while paying off their debt. Therefore, it seems, at least at the beginning, the companies should at least monitor the
savings of their clients to ensure that they are making progress.
In a similar vein, one could argue that the companies should establish fiduciary
accounts for their clients to ensure that they can actually pay off the offers once
they are received. Otherwise, what should the company do with their clients who
are not saving? However, the extant literature is ripe with examples of abuses for
these accounts (see, e.g., Plunkett 2009). Therefore, guidance from regulatory, consumer advocacy and industry groups would be helpful in this area.
My recommendation in this area is to strike a balance from the different approaches. First, allow DSPs to set up trust accounts where monies can only be released to pay creditors (with a signed letter from the creditor and consumer), to pay
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agreed upon reasonable program fees (agreed upon on the creation of the account)
or refunded to the client upon termination of the program or upon demonstration
of a new financial hardship (e.g., medical bills). Second, the DSPs should be allowed
to monitor these accounts to ensure that their client is saving, and consumer saving
being one condition of making satisfactory progress in program. If the protections
noted above were in place for consumers making satisfactory progress, the effect
of not saving would remove their protections from creditors and litigation, creating
a very strong incentive to save. It would be an interesting area for future research
to investigate the savings rates for consumers who are enrolled in programs which
have trust funds as an aspect of their programs.
Finally, both CCCSs and DSPs suffer from the same problem where the original
creditors (but not third parties) can continue calling them after they have signed
up for a program and have asked (or the DMP has asked) for the creditors to stop
calling (source: Fair Debt Collections Practices Act or FDCPA). Even worse, even
though the consumer is trying to avoid bankruptcy and litigation, it can be forced
upon the consumer by only one out of many creditors. This phenomenon has been
called the creditors dilemma (Bainbridge 1986). In conversations with the DSP
analyzed below fully 20.5 percent of the consumers who canceled the service gave
bankruptcy as the reason for canceling the program, and another 19.3 percent who
canceled the service gave a reason that was categorized as an outside influence.
The problem is that consumers may be acting in good faith and trying to climb
out of debt, the DMP may be acting in good faith to help the consumer and most
of the creditors can be acting in good faith working with the DMP and the consumer, but one creditor can force failure of the entire process. To be honest, I cant
see a way out of this problem without regulatory action, as similar problems (called
prisoners dilemmas) have been extensively studied and the solutions generally require modifying incentives of the actors (Poundstone 1992). The clear implication is
that consumers need regulatory protection from litigation and harassing calls while
they are making satisfactory progress in these programs.
Timing of Fees
Throughout the above discussion, the issue of when DMPs should receive fees has
not been addressed, so this issue is addressed in this section. This issue is one of
the most contentious for DSPs where Plunkett (2009) and others have suggested
that other than small account set up fees, DSPs should not receive any fees until
the debt is settled. A general response to this recommendation is that this requirement is analogous to forbidding insurance companies from collecting premiums until
a claim is filed, or forbidding attorneys from collecting fees until the matter is settled or forbidding doctors or hospitals from collecting fees until the patient is
healthy.
The recommendation also ignores when value is created for the customers and
when expenses are incurred by the DSPs in creating the value. DSPs create value
for their clients in multiple ways. First, they offer financial education, budgeting,
etc. as part of the program. Given that CCCSs charge consumers for this education
(and receive Federal funding to support the education) (Keating 2008), there can be
no argument that this provides value to the customers. Also, DSPs create value for
the customers (and incur expense) when offers are received from creditors to reduce
their debt (see empirical section below for quantification of this value) whether or
not the consumers actually accept the offers. As shown in the next section, offers
are received on some accounts within 2 months of enrollment in the program.
This recommendation is also inconsistent with the way that CCCSs receive their
fees. An analogous situation would require that CCCSs receive no fees (including
grants and fair share payments from creditors and monthly account maintenance
fees) until the debt is paid off (generally in 5 years), which would make the business
economically unviable without massive government funding. Given the current Federal and state deficits, this funding is unlikely.
Finally, the fact that consumers have to make payments, in and of itself, is educational. It forces consumers to get in the habit of saving and making payments.
If the DSP has a trust account or is otherwise monitoring the savings of the client,
similar expenses to those of CCCSs are incurred.
Therefore, DSPs should be allowed to charge consumers fees prior to the final settlement because value is generated for the clients and expenses are incurred by the
DSP to generate that value. That said, to help protect consumers, any fees before
settlement should reflect actual value generated and expenses incurred. As noted
above, full disclosure of fees is required for consumers to make good choices.
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Repayment on Original Terms
The problem with this alternative is that consumers are already delinquent and
cannot afford the payments. The delinquency may be temporary, but even under the
new credit card rules, consumers would still have 6 months of increased interest
rate payments due to the late payment (Reddy 2009).
Analysis of Debt Settlement Program
In this section, we analyze data from a DSP firm. The purpose of this section is
to analyze specific performance metrics for the firm to establish as a basis for estimating consumer welfare in the next section. Given that the firm has not tracked
education and financial health after a consumer leaves the program, these metrics
are not analyzed. The remainder of this section is organized as follows: the next part
provides a brief description of the data. Next, specific performance metrics are analyzed taking care to control for when a consumer enters the program.
Description of Data
The firm provided three cohorts of random, stratified samples of their data. The
data was stratified into the lowest quartile, middle 50 percent and top quartile in
terms of total indebtedness of the client with a random sample of 500 clients drawn
from each stratum. Three cohorts were also drawn from the data: clients entering
24 months, 18 months and 12 months prior to the date of the data being accessed.
Therefore, the database contains 4500 clientsa very significant sample of consumers in this industry. The client confidentiality is maintained through no identifying information (e.g., demographics, names, credit card account numbers, etc.).
One limitation of this data is that once a consumer cancels their account, no information is retained regarding offers, settlements, etc. That said, the sampling methods imply that the results can be applied to the entire database of clients for this
firm. While the results may not be applicable to the industry as a whole without
some strong assumptions, they are likely applicable to similar firms in industry and
allow several conjectures to be examined in detail.
All creditor accounts, offers to settle (whether or not the client accepted the offer),
offer amounts, date of the offer, whether or not the offer was accepted and if/when
the client canceled the account are included in the data. In addition, the original
creditor was provided so the question of whether or not there are differences in settlement offers due to the volume of accounts could also be tested. Table 2 provides
simple descriptive statistics for the data.
Table 2Descriptive Statistics for Strata

Stratum 1 (Lowest 25%)
Mean
Total Debt
Num Accts
Weeks in Program
Pct Cancelled
7,927
3.7
49.9
59.1
Median
8,000
3.0
49.0
Std Dev
1,223
1.7
33.4
Stratum 2 (Middle 50%)

Mean
Median
16,966
4.6
49.4
58.1
16,138
4.0
50.0
Std Dev
6,788
3.3
46.1
Stratum 3 (Top 25%)

Mean
Median
Std Dev
47,404
6.3
46.9
64.5
40,201
6.0
46.0
21,884
3.3
32.4
Several points are obvious in the table. First, the median weeks are similar for
the three stratums. Therefore, from a time in program standpoint, it appears the
strata are identical. Second, as expected, the number of accounts increases as the
total debt increases. Finally, the cancellation percentages are roughly similar across
the different stratums. However, the top stratum appears to cancel at a much higher rate. We can calculate the weighted average cancellation rate to be approximately
60 percent, this rate is comparable to cell phone companies that average 23 percent
monthly churn, or cancellation, rates (Mozer et al., 2000). Clearly, this rate is high,
but it does compare very favorably with the 84 percent yearly churn rate (Plunkett
2009). However, further analysis of the reasons for cancellation point to the difficulty in calculating accurate cancellation and/or completion rates.
The reasons for cancellation for the customers in the database are summarized
in the five reasons provided in Table 3. There are several striking results from this
table. First, if the outcome of paying off debts is considered a success, then the cancellation rate is overstated because 14 percent of the consumers included as cancellations actually paid off their debt.
Credit Solutions.
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Table 3Reasons for Cancellations
Reason
Percentage
Bankruptcy (Chapter 7 or 13)

Cant Save
Buyers Remorse a
Settle/try to settle on own
Other
13.5%
6.8%
9.2%
14.0%
56.5%
Note: a Buyers remorse is limited to those customers who cancel within 30 days of the initial payment to the DSP, which can be
3060 days from the initial enrollment date.
Second, a significant portion of the consumers (13.5 percent) are being forced out
of the program due to litigation. Therefore, protection of consumers from litigation
is required for those consumers making satisfactory progress in the program. Third,
a significant amount of the cancellations (6.8 percent) are due to consumers not
being able to save. Because the DSP does not monitor/require savings, a significant
portion of the cancellations could have been prevented by significant incentives for
the consumers to save.
Therefore, the aggregate cancellation rate is a poor measure of the quality of the
service provided. To help put the cancellation rate into context, Table 4 provides
yearly and monthly churn rates across a variety of industries, companies and time
periods (selected sample from Kohs 2006) and shows that the churn rate is lower
than or comparable to some companies and subscription-based industries which also
have Better Business Bureau (BBB) certified members.
Table 4Churn rates in other industries

Annual
Churn
7.20%
10.00%
10.00%
11.00%
15.00%
16.00%
17.00%
17.00%
17.00%
18.00%
19.00%
22.00%
23.00%
23.00%
26.00%
26.00%
31.00%
34.80%
35.00%
45.00%
46.00%
46.00%
51.00%
52.00%
58.00%
78.00%
93.00%
93.00%
Monthly
Churn
0.62%
0.88%
0.88%
0.97%
1.35%
1.45%
1.55%
1.55%
1.55%
1.65%
1.76%
2.07%
2.18%
2.18%
2.51%
2.51%
3.09%
3.56%
3.59%
4.98%
5.13%
5.13%
5.94%
6.12%
7.23%
12.62%
22.16%
22.16%
Company
Sirius
Western Wireless
Alamosa PCS
Nascar.com (premium subscribers)
Nextel
Colorado teachers in excellent schools
Schnader Harrison (lawyers)
DirecTV
Alltel
Analog cable subscribers
Cingular
Colorado teachers in unsatisfactory schools
Sprint
Subscribers
T-Mobile
Maricopa County (anglers)
Digital cable subscribers

Globe
Florence (AL) Times Daily (readers)
Snowball.com
Touch Mobile
VOOM
Runoff at time of sale
Industry
Data
Year
Satellite Radio
Web Hosting
Wireless
Wireless
Sports Media
Wireless
Education
Legal
DBS TV
DBS TV
Wireless
Cable TV
Wireless
Education
Wireless
Cable TV
Pagers
Wireless
Recreation
E-mail addresses
Prepaid Calling Cards
Cable TV
Prepaid Wireless
Newspapers
E-mail newsletter
Prepaid Wireless
HD TV
Home Mortgage
2006
2003
2001
2001
2004
2005
2004
2003
2002
2003
2005
2002
2005
2004
2005
2002
1998
2005
2002
2004
2004
2002
2004
2005
2000
2004
2004
2002
Analysis of Data
In this section, different performance metrics are examined for the firm at the client-level.
The first set of metrics in Table 5 provides performance metrics that can be used
to calculate consumer welfare. The first column represents the conditioning of the
metric: Settledid the client settle at least one account, Offerdid the client receive at least one offer on the account, Canceldid the client cancel all of their accounts. Note that the company did not retain offer and settlement information once
the accounts were canceled.
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Table 5Consumer welfare metrics
Stratum 1 (Lowest 25%)
Condition
Metric
Mean
Settle
Offer
Cancel
% Debt
% Total Debt
% Accounts
Days first
settlement
% Debt
% Total Debt
% Accounts
Days first
offer
Days Cancel
Median
Stratum 2 (Middle 50%)
Std
Dev
Mean
Median
Std
Dev
Stratum 3 (Top 25%)

Mean
Median
Std
Dev
51.0
54.7
52.0
211 a
48.8
50.7
50.0
189
0.19
0.30
0.27
116
48.5
54.1
51.5
196 a,b
46.7
50.6
50.0
177
0.27
0.45
0.39
154
49.2
53.1
53.0
183 b
47.5
49.4
50.0
163
0.19
0.32
0.29
99
62.2
56.5 b
57.3 b
210 a
64.2
51.5
50.0
188
0.29
0.18
0.28
126
56.6
63.7 a,b
59.6 b
186 b
52.2
67.8
50.0
172
0.39
0.43
0.40
148
56.8
67.7 a
64.7 a
168 c
55.7
72.1
66.7
148
0.17
0.29
0.28
95
196
168
145
197
163
207
202
171
155
Notes: Superscript a>b>c with probability less than or equal to 5 percent than they are the same. Values with same letter are not
significantly different.
The second column represents the metric and the remaining columns report the
mean, median and standard deviations for the metrics. Medians are included as a
second measure of central tendency. The percent debt metric measures what percentage of the original debt the consumer paid when the account was settled. There
are not significant differences between the strata, although the results indicate that
the median is less than 48 percent, or that the households received an average discount more than 50 percent. The percent of total metric indicates the percentage
of the original debt that has a settlement (conditional on the client settling at least
one account). Once again there are no significant differences between the strata, but
the median across the three stratums is around 50 percent. The percent of accounts
settled is not different between the strata, and hovers around 50 percent. This indicates that the size of the debt is not a driving factor in getting the account settled.
Interestingly, the only significant effect conditional on settling one account is the
number of days until the first settlement, where the smaller accounts take longer
than the other two. However, the medians for all three strata hover around 6
months. Note that, conditional on settlement, this organization beats the 60-60 rule
noted above.
But when the offers are examined, they suggest a slightly different story. First,
there are no significant differences in the average amount offered (% Debt) for the
three strata. However, the median offer is around 56 percent, much higher than the
48 percent settlement, although both numbers beat the 60 percent of debt rule noted
in the introduction. Hence, it can be concluded that the negotiations work for the
clients. In terms of the percent of the original enrolled total debt (% total debt) that
receives an offer, the highest quartile (median 72%) is significantly different than
the lowest quartile (median 51.5%), but neither quartile is significantly different
from the middle 50 percent (median 67.8%). This result (as well as the differences
between means and medians) suggests high variance in the percent of debt settled,
and that the significance on this metric may be spurious. If it is not spurious, it
then appears that the creditors are more willing to make offers on higher debts,
which is consistent with the analysis of Dash (2009). The results for the percent of
accounts and days until the first offer support this hypothesis, where the highest
quartile receives their first offer sooner than the lowest quartile and median strata,
and the highest quartile has a larger percentage of accounts receiving offers than
the other two strata.
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Figure 2 provides a histogram of the percent of total debt that has either been
settled or offered combining all three strata. There are a couple of striking elements
to this figure. First, the most frequent value (also called the modal value) for both
settlements and offers is between 90 and 100 percent, indicating that the firm is
generating value for their customers. Second, the distribution for both appears to
be uniformly distributed (ignoring the mode). This seems to imply that consumers
are progressing through the program; otherwise I would expect to find another mode
where the clients get stuck in their progress. That said, the firm should strive to
have 100 percent of the debt with offers. This figure also points to the difficulty in
calculating a completion rate. Given that consumers are receiving offers on their
debt but not accepting all of the offers, how should the accounts be counted?
Figure 2Histogram of Percent of Debt Settled and Offered
136
Figure 3 provides a histogram of the percent of the enrolled debt (i.e., original
debt amount) that was either paid during settlement or had a settlement offer, conditional on settlement or receiving an offer. The settlement data appears to be normally distributed with the mean, mode and median slightly less than 50 percent,
much better than that 60-60 rule noted above. A striking feature is that the average
offers are almost normally distributed, but have a positive skew. This positive skew
implies that the creditors tend to make more offers above the mode than below the
mode. Given the distribution of the settlements is more balanced; it implies that the
firm does a good job in negotiating better terms for their clients. Specifically, we
see that the absolute frequency (not just percentage) is much higher for settlements
below the mode than for offers. Similarly, the frequency for offers above the mode
(and median) is much higher for offers than for settlements. The mean, median and
mode (all measures of central tendency) appear to be the same, suggesting that the
firm generates value to their clients by beating the 60-60 rule. However, to manage
client expectations about possible benefits from the program, the firm should be
transparent about the median and 75 percent quartile (i.e., 25 percent quartile in
terms of discount) when calculating savings for the consumer. Given the convergence of mean, median and modes, a standard deviation should also be reported.
Figure 3Histogram of Percent of Debt Paid for in Settlements and Offers
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Next, we look at the cancellation data. There are no significant differences between the three strata. However, the median time to cancel hovers between five and
6 months. Even though there is no data on the offers and settlements for these clients, I find it highly unlikely that this group received no offers in this time, as the
median time approximates the median time for offers and settlements. It is much
more likely that other, unobserved factors were more influential in this decision.
Figure 4 combines the data from the three strata, and provides a histogram of the
time it takes an account to be settled or the time it takes for an account to receive
the first offer. For both settlements and offers, a negative skew is observed for the
distribution.
137
Figure 4Histogram of Time for Settlement or Offer to be Received
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Interestingly, this implies that the creditors are generally very interested in settling the account, with the modal offer time being between 6 and 8 months. The
firm can clearly improve in their performance by reducing the right tail of the offer
distribution, i.e., ensuring that all accounts receive offers in a timely manner. This
graph also depicts how the firm generates value for their customers in the negotiations. By receiving many offers quickly, they can make the creditors compete
against each other for the lump sum payment from the consumer. This competition
is in the form of reducing the principal of the debt.
A problem with this distribution is that, without some sort of regulatory protection, the spurned creditors (i.e., those who do not offer good enough discounts on
the debt, so they are not selected for the lump sum payment) can initiate litigation
that would drive the consumer into bankruptcy, creating unnecessary cancellations
for the firm. A second challenge for this firm is that the savings plan ought to require their clients to save enough in the first 68 months to pay off one of their
creditors, potentially the creditor with the smallest balance. This finding supports
the call for protection of consumers making satisfactory progress in paying their
debts through Debt Management Programs.
In summary, this analysis has several key findings:
1. Creditors seem to make lower offers sooner to consumers with higher balances,
2. The median cancellation time is between 5 and 6 months, implying (due to
a lack of data) that the clients likely received offers, as the median is not very
different than the median offer time. However, it is very difficult to calculate
accurate cancellation rates (often used as a measure of failure of the programs) due to the fact that almost 30 percent of the clients cancel due to paying
off their debts or going into bankruptcy.
3. Both the median offer (approximately 56 percent of debt) and median settlement (48 percent) are better than the proposed 60 percent rule, so the firm is
offering value vis-a-vis the proposed 60-60 rule. Further, the difference between
the settlement and offer percentages implies differences between households
(potentially due to hardship) and that some households receive tremendous
value from the negotiations and relationships of the firm.
4. Conditional on a client settling at least one account, the client seems to settle
more than 50 percent of their debt and 50 percent of their accounts. This statistic is impressive as the program lasts 3648 months, whereas the data only
138
captures the first 1224 months for the client. One would expect that at the end
of the program, the settlement rate would increase.
5. Conditional on receiving at least one offer, clients seem to receive offers for
more than 67 percent of their accounts and debts.
6. The figures seem to indicate that clients are progressing and paying off their
debt, as the mode for the number of offers and settlements is between 90 and
100 percent of the enrolled debt. However, the firm does have room for improvement, as the optimal graph would have 100 percent of the debt with offers.
Calculation of Consumer Welfare
In this section, the empirical results are used to calculate consumer welfare under
a variety of assumptions and conditions.
Table 6 provides the initial base-line estimates for consumer welfare. We use assumptions of 18 percent annual interest rate and minimum fixed monthly payments
of 2 percent and 3 percent for debts of $4,000 and $10,000 (for similar assumptions,
see, e.g., Warnick 2005). The fixed monthly payment of 2 percent is similar to current minimum monthly payments as noted in Warnick (2005). Affordability is measured using monthly payments, and consumer welfare is measured by the length of
time required to pay off the debt and total amount paid by the consumer. By doubling their payment, consumers are able to cut the time to repay the loan in half
and increase their total welfare by paying less to the credit card company.
Table 6Baseline Consumer Affordability and Welfare Calculations

Payment
2%
3%
Debt Level
Annual Interest Rate
Fixed Monthly Payment
Years to Pay
Total Payments
Percent of Original Debt
$4,000
18%
$80
7.8
$7,488
187%
$4,000
18%
$120
3.9
$5,616
140%
2%
3%
$10,000
18%
$200
7.8
$18,720
187%
$10,000
18%
$300
3.9
$14,040
140%
The first scenario examined is when the same consumer receives help from a
CCCS, and the firm is able to cut the interest rate to 10 percent from 18 percent,
and has 5 years to repay (this may be an optimistic assumption, as Plunkett (2009)
says that creditors are becoming less willing to reduce interest rates). The results
of the consumer welfare calculations are provided in Table 7. In order to calculate
total payments (to credit card and the firm), we assume the industry average of $15
per month and a fair share payment of 5 percent of the payments to the credit card
company (Hunt 2005).
Table 7Consumer Affordability and Welfare Calculations for hypothetical CCCS

Debt Level
Years to Pay
Fixed Monthly Payment
Monthly Account Fee
Total Monthly Payments
% Baseline Payments
Total Payments
Percent of Baseline
Firm Fees
% Fair Share
Fair Share Fees
Total Revenue to firm
% Original Debt
$4,000
10%
5
$85
$15
$100
125%
$5,999
150%
80%
$900
5%
$255
$1,155
29%
$10,000
10%
5
$212
$15
$227
114%
$13,648
136%
73%
$900
5%
$637
$1,537
15%
In terms of affordability, both cases are less affordable, i.e., have higher monthly
payments than the base case of paying off the debt using with fixed monthly payments of 2 percent of the original debt. However, consumers are better off with this
solution as they end up paying much less overall (range from 73 percent to 80 percent of the base case payments), even when the monthly account fees are included.
We can conclude that this alternative does help consumer welfare, but it is a generally less affordable solution. If we examine total fees paid, they range from 15 percent to 29 percent of the total debt. Given Plunketts (2009) description of 30 percent
fees as exorbitant, his standard suggests that the CCCS charges exorbitant fees to
lower debt consumers. Additionally, if it is assumed that lower income consumers
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have lower debt then CCCS charges higher fees as a percentage of the debt to lower
income consumers than to higher-income individuals. In fairness, they can argue
that cost of education is the same, regardless of the debt level, but it does not
change the fact that they have a regressive fee structure.
The 60-60 rule is analyzed in the next scenario.
In this case, we assume 40 percent reduction in the debt principal, the interest
rate remains at 18 percent and the firm has varying fees of 15 percent and 20 percent of the original debt balance. Table 8 provides the results of this analysis. This
scenario is more affordable than both the base case and the hypothetical CCCS firm.
Further, consumer welfare is highest where the consumer is paying 5760 percent
of the original base case scenario, even though the consumer ends up paying more
than the original debt. The fees are now neutral in terms of percentages versus debt
and/or income levels, and are progressive in terms of the total fees with respect to
debt/income.
Table 8Consumer Affordability and Welfare Calculations for hypothetical 60-60 rule
Debt Level
Reduction
Years to Pay
Fees as percent of Debt
Monthly Credit Payment
Monthly Fee
Total Monthly Payment
Total Payments
Versus baseline
Fee Payments
$4,000
18%
40%
5
15%
$61
$10
$71
$4,257
106%
57%
$600
$4,000
18%
40%
5
20%
$61
$13
$74
$4,457
111%
60%
$800
$10,000
18%
40%
5
15%
$152
$25
$177
$10,642
106%
57%
$1,500
$10,000
18%
40%
5
20%
$152
$33
$186
$11,142
111%
60%
$2,000
The next scenario is a simplified version of the DSP analyzed in the empirical section above. It is assumed that the fees on the account are 15 percent of the total
debt, debt is reduced to 40, 50 or 60 percent of the original debt amount and the
household makes a balloon payment at the end of 1 year (much shorter than normal
estimates of 3 years). Table 9 provides the results of this analysis. First, this option
creates the highest amount of consumer welfare among all of the different options:
it is the only option where the consumer pays less than the original debt amount.
It is also the least affordable of the options, with monthly payments three times the
base case scenario. Therefore, we can conclude that the firm should carefully screen
consumers for their ability to save and make this payment within 1 year. However,
this finding is highly dependent upon the assumption that the consumer will repay
the debt in 1 year, much less than the above scenarios.
Table 9Consumer Affordability and Welfare Calculations for hypothetical DSP

Debt Level
Reduction
Years to Pay
Fees as percent of Debt
Monthly Credit Payment
Monthly Fee
Total Monthly Payment
% Baseline Payments
Total Payments
Versus baseline
$4,000
40%
1
15%
$200
$50
$250
313%
$3,000
75%
40%
$4,000
50%
1
15%
$167
$50
$217
271%
$2,600
65%
35%
$4,000
60%
1
15%
$133
$50
$183
229%
$2,200
55%
29%
$10,000
40%
1
15%
$500
$125
$625
313%
$7,500
75%
40%
$10,000
50%
1
15%
$417
$125
$542
271%
$6,500
65%
35%
$10,000
60%
1
15%
$333
$125
$458
229%
$5,500
55%
29%
Therefore, we analyze a scenario with a more reasonable time-frame of 3 years,

consistent with Mannings (2009) assumptions, but still shorter than the CCCS or
the 60-60 rule. Table 10 provides the results of this final scenario where the only
change from the previous scenario is that the time to repay the debt is increased
from one to 3 years. Not surprisingly, consumer welfare has not changed from the
previous scenario.
However, the affordability has increased to the point where it is comparable or
better than the base-case and 60-60 rule scenarios, even though the consumers pay
their debt in 3 years instead of 5 years. This result once again suggests that it
would increase consumer welfare if they have protection from creditors and litigation while they are making satisfactory progress in a DSP. It also suggests that
DSPs need a mechanism in their program to monitor client savings to demonstrate
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140
to the creditors that clients are making progress toward being able to afford settlements.
Conclusions and Discussion
Similar to most studies, this research has several limitations. First, the empirical
analysis only examines a single company over a single time period and does not contain educational measurements or other behavioral measurements after the clients
exit the program. Therefore, it is unclear whether or not the findings can be generalized beyond this firm to the industry as a whole. Second, the data does not include
information on settlement offers for canceled accounts, so it is very difficult to determine if value was generated for these customers. However, given that the median
cancellation time is similar to the median time until the first offer, I find it unlikely
that all of these clients received no offers if they stayed in the program long enough.
Probably the most important empirical finding is that this firm adds significant
value to their customers where the median and modal settlement offers are less
than 50 percent of the original debt, much better than the 60-60 rule. This finding
confirms the assumptions in Manning (2009) and calls for programs which reduce
the debt principal as an effective means of helping consumers (Plunkett 2009).
Given the high rate of cancellations due to bankruptcy (13.5 percent), this finding
also suggests that consumers need regulatory protection from creditors (i.e., the
creditors dilemma) while they are making satisfactory progress in the program.
A second important empirical finding is that the upper bound for the cancellation
rate is much lower than speculated (Plunkett 2009). However, accurate cancellation
and completion rates cannot be calculated from the data, as consumers who cancel
due to paying off their debt and who cancel due to entering bankruptcy are included
in the cancellation rates. Further, completion of the program requires consumers to
accept the offers. The data indicate that many more accounts have offers than are
settled, with the modal client having more than 90 percent of their debt with offers.
Even without adjusting the cancellation rate for these factors, the rate is comparable to or lower than other subscription-based businesses which have BBB-certified members. Therefore, excessive cancellation rates cannot be used as a rationale
for excluding DSPs from certification.
Finally, a large portion of the consumers who cancel (6.8 percent) indicate that
they are not able to save enough. This implies that the DSPs need to monitor consumer savings as part of their program. One effective means for doing this would
be to establish third-party trust accounts that have consumer protections in place:
1. Require periodic audits of the accounts,
2. Require arms-length relationship with the DSPs,
3. Only allow disbursements to creditors (with signed letter from creditor and
consumer), to DSPs (for pre-approved fees), to consumers who cancel the program or encounter new financial hardships.
If appropriate savings are pre-conditions for consumer protection from litigation
and harassment from creditors, consumers will have very strong incentives to save
and pay off their debts. The policy simulations have strong implications as well.
First, both CCCSs and DSPs increase consumer welfare versus the consumer paying
off their debt. However, DSPs are the only option where consumers end up paying
off less than 100 percent of their debt, so they create the greatest amount of consumer welfare of any option considered. Not surprisingly, the affordability of the
DSP is dependent upon the length of time the consumer has to save to pay off their
debt. If a three-year period is used, the DSP is comparable in affordability to the
60-60 rule and can be more affordable than CCCSs. This finding adds support to
the recommendation of protecting consumers in the programs to ensure that they
have enough time to build their savings to pay off their debts. This finding also supports the regulatory recommendation of establishing fiduciary accounts that can be
monitored by the DSPs to ensure that consumers are saving enough.
The policy simulations also suggest that CCCSs may be overcharging some of
their clients, where CCCSs receive 29 percent or more of the original debt amount
in consumer fees and fair share payments. Even worse, their fee structure is regressive: where lower debt (and income) clients pay a larger percentage of the original debt amount in fees than higher debt (and income) clients. This finding suggests
regulatory action to require CCCSs to disclose all fees, including fair share payments to consumers, is required to ensure transparency and that consumers can
make good decisions. This finding also suggests that DMPs need to ensure that their
fee structures are at least neutral or progressive in terms of the percentage and
amount of the original debt amount to ensure lower income consumers are not paying unnecessarily large fees.
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While not discussed in the empirical or policy sections, the extant literature suggests that education should be required to be provided as part of any certified DMP
due to the positive outcomes. However, satisfactory progress in DMPs should also
include satisfactory progress in the educational programs, which implies firms need
to monitor and measure educational attainment. Technologies for this already exist,
where consumers can already take driving educational courses over the Internet.
Finally, we find that charging consumers reasonable up-front fees, i.e., fees before settlement, is consistent with practices in other industries, e.g., legal industry,
and can be justified based on value provided to consumers as well as expenses incurred generating this value. Any attempt to ban these fees would have a chilling
effect on the industry and is inappropriate for this industry.
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Counseling, Consumer Federation of America.
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2009: U.S. Department of Labor.
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Warnick, Melody (2005), Credit card minimum payments rising, Vol. 2009:
Bankrate.com.
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Appendix A: Definition of Acronyms
BAPCPABankruptcy Abuse Prevention and Consumer Protection Act
CCCSConsumer Credit Counseling Service.
DMPDebt management programthis term refers to a program that is intended
to help a consumer pay off their debt, so it refers to both CCCSs and DSPs.
DSPDebt Settlement Program.
Settlementrefers to when the consumer and creditor agree to terms (may be one
or more payments, could be all or only some of the principal, fees and interest) to
repay the debt.
About the Author
Richard A. Briesch is Associate Professor of Marketing. He received his BS degree
in Applied Mathematics from Carnegie Mellon University, MBA from Rice University and PhD from Northwestern University. His research interests include: modeling consumer decisionmaking, sales promotions, and econometric methods, including non-parametric techniques. His articles have appeared in journals such as: Marketing Science, Journal of Marketing Research, Journal of the American Statistical
Association, Journal of Consumer Research, Journal of Retailing, Marketing Letters
and Journal of Business and Economic Statistics. He has won the Davidson award
for the best paper in the Journal of Retailing in 2002, the Cox Schools research excellence award in 2009, and outstanding teaching award in 2007.
For more information, visit: http://www.cox.smu.edu/academic/professor.do/
briesch
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S. HRG.

THE DEBT SETTLEMENT INDUSTRY:

APRIL 22, 2010

U.S. GOVERNMENT PRINTING OFFICE

For sale by the Superintendent of Documents, U.S. Government Printing Office

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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

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Hearing held on April 22, 2010 ..............................................................................

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THE DEBT SETTLEMENT INDUSTRY:

OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV,

The CHAIRMAN. We will begin this hearing.

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UNDERCOVER GAO CALLS

DEBT SETTLEMENT COMPANIES

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Mr. KUTZ. Mr. Chairman, I applaud your efforts today to protect

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Code Ann. 6.1363.2.26.

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TASC is a nonprofit trade association that lobbies

Stopping payments will knock [credit score] down

According to FICO, stopping payments to creditors

According to FICO, settlements are typically listed

Company advertises a National Debt Relief Stimulus Plan.

The companys services are not affiliated with a

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Location of company and affiliates

Florida; affiliates in Florida,

Advance fees based on 15 percent of enrolled debt,

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Advance fees based on 12 percent of enrolled debt

Location of company and affiliates

Advance fees based on 16 percent of enrolled debt,

TASC (at the time

Advance fees based on 17 percent of enrolled debt,

Advance fees based on 15 percent of enrolled debt